Title: Asset pricing and co-skewness risk: evidence from India

Authors: Sushma Vishnani

Addresses: Jaipuria Institute of Management, Vineet Khand, Gomtinagar, Lucknow-226010, Uttar Pradesh, India

Abstract: This paper analyses the validity of the three-moment CAPM model in the Indian context. The study is intended to find out whether co-skewness risk is priced in the Indian capital market. To analyse the validity of the three-moment CAPM model in the Indian context, a time period of around 12 years from January 1999 to June 2010 has been chosen. The sample covers 283 companies comprised in BSE-500 index of Bombay Stock Exchange of India. S&P CNX 500 index has been considered as a proxy for the market portfolio. The empirical results of the study confirm the validity of the three-moment CAPM in the Indian capital market and suggest that in addition to systematic standard deviation risk, co-skewness risk is also priced in the Indian capital market when investors price individual securities. The results of the study further show if co-skewness risk is not incorporated in the CAPM model, the traditional CAPM overestimates the expected market premium by 0.30% per month (3.67% per annum compounded annually).

Keywords: capital asset pricing model; CAPM; risk-return trade-off; co-skewness risk; beta; India; Bombay Stock Exchange; stock markets.

DOI: 10.1504/AAJFA.2013.054423

Afro-Asian Journal of Finance and Accounting, 2013 Vol.3 No.3, pp.208 - 221

Received: 20 Jul 2011
Accepted: 22 May 2012
Published online: 28 Jun 2014 *

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