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A higher-moment CAPM of Korean stock returns

Author

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  • Marco Wolfle
  • Roland Fuss

Abstract

The traditional Capital Asset Pricing Model (CAPM) developed by Sharpe, Lintner and Mossin is based on the strong assumption of normally distributed returns among other restrictions. However, especially in emerging stock markets, returns often deviate from normality, even though the series are of lower frequency. This paper extends upon the traditional framework of the expected equilibrium return of Korean stocks by incorporating higher order moments in order to explain their risk-return characteristics. Empirical evidence shows that a higher-moment CAPM increases the explanatory power of the return generating process. Particularly, in up-market phases, where the return on the market portfolio exceeds the risk-free interest rate, expected return, covariance, co-skewness and co-kurtosis are related.

Suggested Citation

  • Marco Wolfle & Roland Fuss, 2010. "A higher-moment CAPM of Korean stock returns," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 3(1), pages 24-51.
    • Handle: RePEc:ids:ijtrgm:v:3:y:2010:i:1:p:24-51
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    Cited by:

    1. Akbar, Muhammad & Nguyen, Thuy Thu, 2016. "The explanatory power of higher moment capital asset pricing model in the Karachi stock exchange," Research in International Business and Finance, Elsevier, vol. 36(C), pages 241-253.

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