The pricing of coskewness and cokurtosis risks on the UK stock market

Kashif, Muhammad (2013) The pricing of coskewness and cokurtosis risks on the UK stock market. PhD thesis, University of Glasgow.

Abstract

This thesis explores the asset pricing implication of higher moments of return distributions on the UK stock market. It is found that in a market populated by risk-averse, prudent and temperate investors, firms whose returns exhibit negative coskewness (CSK) or positive cokurtosis (CKT) yield higher premia relative to counterpart firms with positive coskewness and negative cokurtosis respectively. Furthermore, results show that CSK and CKT are genuinely priced in the UK stock markets and outperform the covariance risk, size, value, and momentum factors in explaining the expected cross-sectional variation in asset returns. It is further found that a theoretically motivated, higher co-moment asset pricing model has a significant explanatory ability over the cross-section of CSK and CKT portfolio returns. A CSK- and CKT-augmented CAPM performed better in explaining the cross-sectional variation in expected returns as compared to empirically-motivated asset pricing models, such as the three-factor model (Fama-French 1996) and the four-factor model (Carhart 1997). In particular, a unit factor loading of CSK risk yields a statistically significant monthly premium of 0.22% (2.64% p.a.) across CSK portfolios and a unit factor of CKT risk 0.15% (1.8% p.a.) across the CKT portfolios.
Motivated by the significance of CSK and CKT, this thesis also explores whether higher co-moments of asset returns can explain the profitability of a number of investment strategies; size, value, asset growth, accruals, dividend yield, net stock issue and momentum. In particular, this study shows that in the UK stock market, firms with low asset growth and net-stock issue have higher subsequent stock returns compared to counterpart firms with high asset growth and net-stock issue. Furthermore, the performance of the above investment strategies continues even if their portfolio returns are adjusted for risk factors such as size, value, and momentum of the Fama-French three-factor (1993) and Carhart four-factor (1997) models. The introduction of CSK and CKT factor loadings into commonly used asset pricing models shows a slight decrease in the profitability of size, value, asset growth and net-stock issue but returns remain significantly positive. However, CSK and CKT factor loadings have no impact on the profitability of momentum, dividend yield and accruals strategies. Overall, risk-adjusted performance of the above investment strategies remains intact in the UK stock markets during 1990 to 2008. The use of higher moments is suggested when exploring risk-adjusted returns.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Additional Information: Due to copyright restrictions the full text of this thesis cannot be made available online. Access to the printed version is available once any embargo periods have expired. Chapter 4 of the thesis has been published in the journal of banking and finance with Dr Alexandros Kostakis and Dr Antonios Siganos, Alexandros Kostakis, Kashif Muhammad, Antonios Siganos, Higher co-moments and asset pricing on London Stock Exchange, Journal of Banking and Finance, Volume 36, Issue 3, March 2012, Pages 913-922, ISSN 0378-4266, http://dx.doi.org/10.1016/j.jbankfin.2011.10.002 (http://www.sciencedirect.com/science/article/pii/S0378426611002792)
• Keywords: Asset pricing; Coskewness; Cokurtosis; Stock market anomalies; London Stock Exchange
• Subjects: H Social Sciences > H Social Sciences (General); H Social Sciences > HB Economic Theory; H Social Sciences > HG Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Supervisor's Name: Siganos, Dr. Antonios, Kostakis, Dr. Alexandros and Byrne, Dr. Joseph
• Date of Award: 2013
• Depositing User: DR MUHAMMAD KASHIF
• Unique ID: glathesis:2013-4654
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 20 Nov 2013 09:17
• Last Modified: 17 Nov 2016 09:15
• URI: https://theses.gla.ac.uk/id/eprint/4654

Related URLs

• http://dx.doi.org/10.1016/j.jbankfin.201...