The Coskewness Puzzle

42 Pages Posted: 19 Oct 2005 Last revised: 7 Dec 2009

See all articles by Valerio Potì

Valerio Potì

University College Dublin

Dengli Wang

affiliation not provided to SSRN

Date Written: December 1, 2009

Abstract

We propose a novel approach to testing non-linear stochastic discount factor (SDF) specifications that arise in rational representative investor models. Our approach does not require overly-restrictive assumptions about the shape of investors’ preferences, typically imposed by the extant literature, and is based instead on restrictions that rule out “good deals”, i.e. arbitrage opportunities as well as unduly large Sharpe ratios. We apply this framework to test the empirical admissibility of 3 and 4-moment versions of the CAPM. We find that, while coskewness and cokurtosis risk help price a number of stock strategies and portfolios, including static strategies based on a fine industry-level diversification, momentum strategies and portfolios managed on the basis of available information, the CAPM and its 3 and 4-moment versions cannot provide an exhaustive account of observed asset returns.

Keywords: Coskewness, asset pricing

JEL Classification: G11, G12

Suggested Citation

Potì, Valerio and Wang, Dengli, The Coskewness Puzzle (December 1, 2009). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=821315 or http://dx.doi.org/10.2139/ssrn.821315

Valerio Potì (Contact Author)

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

HOME PAGE: http://https://people.ucd.ie/valerio.poti

Dengli Wang

affiliation not provided to SSRN