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Conditional skewness in asset pricing tests (2000)
| Venue: | Journal of Finance |
| Citations: | 340 - 6 self |
BibTeX
@ARTICLE{Harvey00conditionalskewness,
author = {Campbell R. Harvey and Akhtar Siddique},
title = {Conditional skewness in asset pricing tests},
journal = {Journal of Finance},
year = {2000},
pages = {1263--1296}
}
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Abstract
If asset returns have systematic skewness, expected returns should include rewards for accepting this risk. We formalize this intuition with an asset pricing model that incorporates conditional skewness. Our results show that conditional skewness helps explain the cross-sectional variation of expected returns across assets and is significant even when factors based on size and book-to-market are included. Systematic skewness is economically important and commands a risk premium, on average, of 3.60 percent per year. Our results suggest that the momentum effect is related to systematic skewness. The low expected return momentum portfolios have higher skewness than high expected return portfolios. THE SINGLE FACTOR CAPITAL ASSET PRICING MODEL ~CAPM! of Sharpe ~1964! and Lintner ~1965! has come under recent scrutiny. Tests indicate that the crossasset variation in expected returns cannot be explained by the market beta alone. For example, a growing number of studies show that “fundamental” variables such as size, book-to-market value, and price to earnings ratios
Keyphrases
conditional skewness asset pricing test systematic skewness earnings ratio book-to-market value asset pricing model risk premium return portfolio crossasset variation fundamental variable market beta momentum effect cross-sectional variation return momentum portfolio asset return recent scrutiny
