Higher‐order moments and asset pricing in the Australian stock market

Abstract

AbstractThis paper investigates a set of realised higher‐order co‐moment risk–return relationships in the Australian stock market. We test the predictive power of the asset pricing model by implementing the two‐, three‐, four‐moment Capital Asset Pricing Model. Our findings show that investors respond differently to information related to realised higher‐order co‐moments, and that the corresponding gamma (normalised co‐skewness) and kappa (normalised co‐kurtosis) risk factors remain priced in the presence of continuous beta and jump beta. Furthermore, we find that the realised high‐order co‐moment risk measures are priced differently and remain significant even when combined with a set of firm characteristics.