Asset pricing models in the presence of higher moments: Theory and evidence from the U.S. and China stock market

Abstract

Harvey and Siddique (2000) show that a security's coskewness, measured by the comovement of its stock return and the variance of market return, significantly explains its stock performance. We extend this idea in two significant ways. Conceptually, we show that the comovements of individual security performance and higher moments of market performance are critical components of asset return determinants. Empirically, we examine and compare the performance of high-moment capital asset pricing models (CAPM) in the U.S. and Chinese stock markets. The empirical results show that the coskewness and cokurtosis of securities have a significant impact on their performance. We observed that models incorporating higher moments provide greater explanatory power than the traditional CAPM model, particularly in the Chinese market. This is due to the high sensitivity of stocks in this market to tail risks, which can be attributed to the market's immaturity and the higher proportion of individual investors.