High-order moments in stock pricing: evidence from the Chinese and US markets

Abstract

Purpose

The purpose of this paper is to introduce an augmented high-order capital asset pricing model (AH-CAPM) as a new risk-based model to price stocks.

Design/methodology/approach

The AH-CAPM is defined as a linear model with high-order marginal moments and co-moments from the joint distributions of the sorted stock portfolio returns and the market return.

Findings

The performance of the AH-CAPM is tested in the Chinese and US stock markets. Empirical results show that the high-order marginal moments and co-moments from the joint distributions in AH-CAPM contain the risk and return information implied by the Fama–French factors, indicating it as a better risk measurement. Moreover, the AH-CAPM performs better than the Fama–French three-factor model and the Carhart four-factor model in both the Chinese and US stock markets.

Originality/value

Overall, this study introduces a new asset pricing model with better measurements to incorporate risk information in the stock market.

Citation

Chen, Y., Chen, Z. and Tang, H. (2020), "High-order moments in stock pricing: evidence from the Chinese and US markets", China Finance Review International, Vol. 10 No. 3, pp. 323-346. https://doi.org/10.1108/CFRI-06-2019-0070