The Coskewness Puzzle
42 Pages Posted: 19 Oct 2005 Last revised: 7 Dec 2009
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: Suggested Citation
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