Title: A higher-moment CAPM of Korean stock returns

Authors: Marco Wolfle, Roland Fuss

Addresses: Institut zur Erforschung der wirtschaftlichen Entwicklung, Albert-Ludwigs-Universitat Freiburg, Platz der Alten Synagoge/KG II, 79085 Freiburg im Breisgau, Germany. ' Union Investment Chair of Asset Management, European Business School (EBS), Rheingaustr. 1, 65375 Oestrich-Winkel, Germany

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.

Keywords: co-skewness; co-kurtosis; higher-moment CAPM; return generating process; emerging markets; Korea; market conditions; risk premia; stock returns; capital asset pricing model; stock markets; emerging markets.

DOI: 10.1504/IJTGM.2010.030407

International Journal of Trade and Global Markets, 2010 Vol.3 No.1, pp.24 - 51

Available online: 15 Dec 2009 *

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