Asset Pricing, Higher Moments, and the Market Risk Premium: A Note

Abstract

The purpose of this note is to examine, theoretically, why the market risk premium (R^_ g\ raa y influence tests of asset pricing models with higher moments. When moments of higher order than the variance are added to a pricing model developed within the usual two-fund separation assumptions, the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment's coefficient.

Evaluation of Investment Strategies with Options

“…Indeed, many studies have been presenting enough empiric evidence on the investors' preferences for the asymmetry [e.g. : Jean (1971), Feldstein (1969, Arditti (1971), Levy (1974), Sears and Wei (1985)]. Kraus and Litzenberger (1976), by trying to systematize the relationship asymmetry -assets' prices, extend CAPM (Capital Asset Pricing Model) of Sharpe (1964) and Lintner (1965), to the third moment.…”

The role of co-skewness in the pricing of real estate

“…The specification given in equation )2) assumes that the return on the market is normally distributed (m 3 = 0) which in turn implies that the multicollinearity between risk (/3i) and skewness (miMM) is reduced. 5 Another advantage is that the issue raised by Sears and Wei (1985) concerning incorrect conclusions on the sign of the skewness parameter when the market risk premium is negative is obviated. 6…”

Towards a transdisciplinary econophysics

“…When  > 0 indicates a distribution skewed toward the right (totally asymmetric toward the left if  = -1), with most values concentrated on the right but the most extreme values on the left of the statistical distribution. This parameter is already well known in financial economics, since many works are devoted to the analysis of the skewness of financial distributions (see, for example, Rubinstein (1973), Sears and Wei (1985) or Harvey and Siddique (2000)). …”