Javid, Attiya Yasmin (2009): Test of Higher Moment Capital Asset Pricing Model in Case of Pakistani Equity Market. Published in: European Journal of Economics, Finance and Administrative Studies No. 15 (2009)
Download (514Kb) | Preview
In this study we test the mean-variance capital asset pricing model (CAPM) developed by Sharpe (1965) Lintner (1966) on individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan for the period 1993-2004 using daily and monthly data. The empirical findings do not support standard CAPM as a model to explain assets pricing in Pakistani equity market. In response to this finding first, we have extended the model to mean-variance-skewness and mean-variance-skewness-kurtosis model following Kraus and Litzenberger (1976). In the second step we allow the covariance, coskewness and cokurtosis to vary over time in autoregressive context leading to conditional three-moment CAPM and conditional four-moment CAPM. The results of unconditional and conditional higher-moments CAPM reveal that three-moment CAPM performed relatively well in explaining risk-return relationship in Pakistan during the sample period However, the results of higher-moment model indicate that systematic covariance and systematic cokurtosis have marginal role in explaining the asset price behavior in Pakistan.
|Item Type:||MPRA Paper|
|Original Title:||Test of Higher Moment Capital Asset Pricing Model in Case of Pakistani Equity Market|
|Keywords:||Covariance, coskewness, cokurtosis, non-normal return distribution, capital asset pricing model, time-varying moments|
|Subjects:||C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C29 - Other
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
|Depositing User:||Attiya Yasmin Javid|
|Date Deposited:||12. Apr 2012 12:47|
|Last Modified:||13. Feb 2013 03:55|
 Ahmad Eatzaz and Badar-u-Zaman, 1999 “Volatility and Stock Return at Karachi Stock Exchange”, Pakistan Economic and Social Review 37:1, pp 25–37.
 Ang, Andrew and Joseph Chen, 2002, “Asymmetric Correlation of Equity Portfolio”, Journal of Financial Economics. 63, pp 443-494.
 Ang, Andrew, Joseph Chen and Yuhang Xing 2006, “Downside Risk”, Review of Financial Studies. 19, pp 1191-1230.
 Athayde, G. M. and Renato G. F. Jr., 2006, “Introducing Higher Moment in CAPM”, Basic Ideas. EPGE, Fundeqoo Getulio Vargas, Rio de Janeiro
 Bodurtha, James N. and Nelson C. Mark, 1991, “Testing the CAPM with Time Varying Risk and Return”, Journal of Finance 66:4, pp 1485–1505.
 Black, Fisher, Machael C. Jensen and Mayron Scholes, 1972, “The Capital Asset Pricing Model: Some Empirical Test”, In Michael C. Jensen (ed.) Studies in the Theory of Capital Markets. New York: Prager. 79–121.
 Christie-David, R. and M. Chaudhary, 2001, “Coskewness and Co-kurtosis in Future Markets”, Journal of Empirical Finance 8, 55–81.
 Fang, H. and T. Y. Lai, 1997, “Co-Kurtosis and Capital Asset Pricing”, The Financial Review 32, pp 293–307.
 Chang, Y. P., Johnson H., and M. J. Schill, 2001, “Asset Pricing when Returns are Non-normal: Fama- French Variables Versus Higher-Order Systematic Co-movement”, A. Gary Anderson Graduate School of Management. University of California, Riverside. Working Paper.
 Cook, Thomas J. and Michael S. Rozeff, 1984, “Size and Earning/Price Ratio Anomalies: One Effect or Two”, Journal of Financial and Quantitative Analysis, 19:4, pp 449-466.
 Dittmar, Robert F., 2002, “Nonlinear Pricing Kernels, Kutosis Preferences and Evidence from the Cross-section of Equity Return”, Journal of Finance, 51:1, pp 369-403.
 Engle, R. F., 1982, “Autoregressive Conditional Heteroskedasticity with Estimates of UK Inflation”, Econometrica 50, pp 987–1007
 Friend, J., and R. Westerfield, 1980, “Co-Skewness and Capital Asset Pricing”, Journal Finance, pp 897–913.
 Fang, H. and T. Y. Lai, 1997, “Co-Kurtosis and Capital Asset Pricing”, The Financial Review 32, pp 293–307
 Fama, Eugene F. and Kenneth R. French, 1993, “Common Risk Factors in the Returns of Stocks and Bonds”, Journal of Financial Economics 33, pp 3–56.
 Fama, Eugene F. and James D. MacBeth, 1973, “Risk, Return and Equilibrium: Empirical Tests”, Journal of Political Economy 81:3, pp 607–36.
 Galagedera, D. Henry, D. and P. Silvapulle, 2002, “Conditional Relation Between higher moments and Stock Returns: Evidence from Australian Data”, Proceedings from the Econometric Society Australian Meeting. CD Rom, Queensland University of Technology. Brisbane, Australia.
 Gibbons, Michael R., Stephen A. Ross, and Jay Shanken, 1989, “A Test of the Efficiency of a Given Portfolio”, Econometrica 57:5, pp 1121–1152.
 Green, C. J., 1990, “Asset Demands and Asset Prices in UK: Is There a Risk Premium”, Manchester School of Economics and Social Studies. 58.
 Hansen, B. E., 1994, “Autoregressive Conditional density Estimation”, International Economic Review 35, pp 705–730.
 Harvey, C. R., 1995, “Predictable Risk and Return in Emerging Markets”, The Review of Financial Studies 8, pp 773–816.
 Harvey, C. R., 2002, “The Drivers of Expected Return in International Market”, Emerging Markets Quarterly.
 Harvey, C. R. and A. Siddique, 1999, “Autoregressive Conditional Skewness”, Journal of Financial and Quantitative Analysis 34, pp 456–487.
 Harvey, C. R. and A. Siddique, 2000a, “Conditional Skewness in Asset Pricing Tests”, Journal of Finance 55, pp 1263–1295.
 Harvey, C. R. and A. Siddique, 2000b, “Time Varying Conditional Skewness and the Market Risk Premium’, Research in Banking and Finance 1:1
 Hawawini, G. A., 1980, “An Analytical Examination of the Underlying Effect on Skewness and other Moments”, Journal of Financial and Quantitative Analysis, pp 1121–1127.
 Hawawini, G. A., 1993, “Market Efficiency and Equity Pricing: International Evidence and Implications for Global Investigation. In D. K. Das (ed.) International Finance: Contemporary Issues. London and New York.
 Homaifar, G. and D. Graddy (1988) Equity Yields in Models Considering Higher Moments of the Return Distribution”, Applied Economics 20, pp 325–334.
 Hussain, Fazal and J. Uppal, 1998, “The Distribution of Stock Return in Emerging Market: The Pakistani Market. Pakistan Economic and Social Review 36:1, 47–52.
 Hwang, S. and S. Satchell, 1999,“Modeling Emerging Risk Premia Using Higher Moments”, International Journal of Finance and Economics, 4:1, pp 271-296.
 Kraus, A. and R. Litzenberger, 1976, “Skewness Preference and the Valuation of Risky Assets”, Journal of Finance, pp 1085–1094.
 Ingersoll, J., 1975, “Multidimentional Security Pricing”, Journal of Financial and Quantitative Analysis, 10:4, pp 785-798.
 Iqbal, Javed, Robert D, Brooks and D. A. U. Galagedera, 2007, “Asset Pricing with Higher Co-movement and Alternate Factor models: The Case of Emerging Markets”, Working Paper, Monash University.
 Iqbal, Javed, Robert Brooks and D. U. Galagedera, 2008, “Testing Conditional Asset Pricing Model: An Emerging Market Perspective”, Working Paper 3/08. Monash University, Australia.
 Javid, Attiya Y. and Eatzaz Ahmad, 2008, “Conditional Capital Asset Pricing Model: Evidence from Pakistani Listed Companies.”, PIDE Working Paper 25
 Javid, Attiya Y. and Eatzaz Ahmad, 2008, “Multi-Moment Asset Pricing Behavior of the Listed firms at Karachi Stock Exchange”, PIDE Working Paper 47.
 Jean, W., 1971, “The extension of Portfolio Analysis in the Three and More Parameters”, Journal of Financial and Quantitative Analysis. 6:1, pp 505-515.
 Jensen, D. and De Varies, C., 1991, “On the Frequency of Large Stock Returns: Putting Booms and Bursts into Perspective”, Review of Economics and Statistics, 73,
 Kane, A., (1982, “Skewness Preferences and Portfolio Choice”, Journal of Financial and Quantitative Analysis, 7:1, pp 15-26.
 Lau, S., Quay, S. and C. Ramsey, 1975, “The Tokyo Stock Exchange and the Capital Asset Pricing Model”, Journal of Finance 30.
 Lim, K. G., 1989, “A New Test of the Three-moment Capital Asset Pricing Model”, Journal of Financial and Quantitative Analysis 24, pp 205–216.
 Lintner, J., 1966, “The Valuation of Risk Assets and Selection of Risky Investments in Stock Portfolio and Capital Budgets”, Review of Economics and Statistics 47:1, pp 13–47.
 Lee, C. F., 1977, “Functional Form, Skewness Effect and the Risk Return Relationship”, Journal of Financial and Quantitative Analysis, 12:1, pp 55-72.
 Messis, Petros, George Latridis and George Blanas, 2007, “CAPM and Efficacy of Higher Moment CAPM in the Athens Stock Market: an Empirical Approach”, International Journal of Applied Economics, 4:1, 60-75.
 McCulloch H., 1997 “Measuring Tail Thickness in order to Estimate the Stable Index : A Critique”, Journal of Business and Economics Statistics, 15, pp 74-81.
 Ng, L., 1991, ‘Tests of CAPM with Time Varying Covariance: A Multivariate GARCH Approach”,. Journal of Finance, 46: 4, pp 1507-1521.
 Post, Thierry, Pim van Vliet and Haim Levy, 2008, “Risk Aversion and Skewness Preference”, Journal of Banking and Finance 32.
 Post, Thierry, Pim van Vliet (206) Downside Risk and Asset Pricing”, Journal of Banking and Finance 30, pp 823-849.
 Poti, Valerio, 2004, “Coskewness and Conditional Asset Pricing. Working Paper Trinityand Dublin City University Business School.
 Poti, Valerio, 2005, “The Coskewness Puzzle”, Working Paper. Dublin University.
 Ranalddo, Angelo and Laurant Fave, 2005, “How to price Hegde Fungs: From Two to Four Moment CAPM”, Working Paper, Swiss National Bank, Zurich, Switzerland.
 Rubinstein (1973) M., 1973, “The Fundamental Theorem of Parameter Preference Security Valuation”, Journal of Financial and Quantitative Analysis, 8:1, pp 61-69.
 Sareewiwathana, P. and Malone, 1985, “.Market Behavior and the Capital Asset Pricing Model in Securities and Exchange of Thailand: An Empirical Application”, Journal of Banking and Finance, 12.
 Sauer, A. and A. Murphy, 1992, “An Empirical Comparison of Alternative Models of Capital Asset Pricing in Germany”, Journal of Banking and Finance, 16.
 Scot, R. C. and Phillip, A. Horvath, 1980, “On the Direction of Preference for Moments of Higher Order than the Variance”, Journal of Finance. 35. pp 915-1253.
 Sears, R. S. and Wei, K. C. J., 1985, “Asset Pricing, Higher Moments, and the Market Risk Premium: A Note”, Journal of Finance. 40. pp 1251-1251.
 Sharpe, W. F., 1965, “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk”, Journal of Finance 19(3), pp 425-442.
 Smith, Daniel R., 2007, “Conditional Coskewness and Asset Prices”, Journal of Empirical Finance 14, pp 97-119.