Momentum, Size and Value Factors versus Systematic Co-Moments in Stock Returns

Abstract

Further information on publisher's website:http://www.dur.ac.uk/business/faculty/working-papers/ Publisher's copyright statement:Additional information: Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. Momentum, Size and Value Factors versus Systematic Co-moments in Stock Returns AbstractThis article assesses the empirical performance of the momentum, size and book-tomarket factors versus higher systematic co-moments and also examines whether the momentum factor (WML) proxies for higher systematic co-moments. Both the three and four-moment CAPMs have lower absolute pricing errors than the Fama and French (1973) and the Carhart (1997) models. The three-moment CAPM that incorporates coskewness well explains the cross-section of returns of size portfolios.The four-moment CAPM that further incorporates cokurtosis well explains the cross-section of momentum returns. The momentum factor, apart from SMB and HML factors, also proxies for the measures of market risk not captured by the twomoment CAPM.JEL Classifications: G11; G12

Geometric and arithmetic realized comoments

“…and Chung et al (2006) and Hung (2008) demonstrate that comoments above the fourth order are priced. Accordingly, we attempt to identify the realized comoment above the fourth-order under the arithmetic sense.…”

Return Explanatory Ability and Predictability of Non-Linear Market Models

“…Also, recent research has suggested that the size and book-to-market factors of Fama and French (1996), which explain the size effect first documented by Banz ( 1981), may be proxies for higher-order systematic co-moments of returns (Chung et al, 2006). In addition, Hung (2007) shows that both momentum and size effects are partly attributable to coskewness and cokurtosis risks. Fuertes, Miffre and Tan (2005) also point out that momentum returns are related to non-normality risk.…”

Return Predictability of Higher‐Moment CAPM Market Models

“…Chung, Johnson and Schill (2006) suggest that the size and book‐to‐market factors of Fama and French (1996), which explain the size effect documented by Banz (1981), may be proxies for higher‐order systematic co‐moments of returns. In addition, Hung (2008) shows that both momentum and size effects are attributable to higher‐order systematic co‐moment risk.…”