Higher co-moments and asset pricing on London Stock Exchange

Kostakis, Alexandros; Muhammad, Kashif; Siganos, Antonios

Abstract

This study examines the asset pricing implications of preferences over the higher moments of returns’ distributions. We show that in a market populated by risk-averse, prudent and temperate investors, firms whose returns exhibit negative coskewness or positive cokurtosis should yield higher premia relative to counterpart firms with positive coskewness and negative cokurtosis respectively. These theoretical predictions are empirically tested using a comprehensive dataset of shares listed on the London Stock Exchange during the period 1986–2008. Our empirical results confirm that coskewness and cokurtosis premia are genuinely priced in the UK market, over and above what covariance risk, size, value and momentum factors can explain. We also show that a theoretically motivated, higher co-moment asset pricing model has significant explanatory ability over the cross-section of coskewness and cokurtosis portfolio returns.

Citation

Kostakis, A., Muhammad, K., & Siganos, A. (2012). Higher co-moments and asset pricing on London Stock Exchange. Journal of Banking and Finance, 36(3), 913-922. https://doi.org/10.1016/j.jbankfin.2011.10.002

• Journal Article Type: Article
• Acceptance Date: Oct 2, 2011
• Online Publication Date: Oct 8, 2011
• Publication Date: 2012-03
• Deposit Date: Jul 6, 2021
• Journal: Journal of Banking & Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 36
• Issue: 3
• Pages: 913-922
• DOI: https://doi.org/10.1016/j.jbankfin.2011.10.002
• Keywords: Asset pricing, Coskewness, Cokurtosis, London Stock Exchange
• Public URL: http://researchrepository.napier.ac.uk/Output/2785080