The effects of skewness and kurtosis on excess return based on CAPM

Abstract

The main aim of our research is to investigate how higher order moments of distribution such as systematic skewness and systematic kurtosis influence the investors’ behaviour and their expected returns. In our study, we followed Fama Macbeth two-step procedure for US stock market over the period 1963 to 2019. Firstly, we proved that CAPM should be expanded by the measures of conditional co-skewness and co-kurtosis and found that investors require a higher return for bearing higher systematic variance, negative systematic skewness, and higher systematic kurtosis. Secondly, considering the effect between systematic skewness and systematic kurtosis simultaneously in addition to the main risk factors provides more accurate results. Thirdly, we identified empirical evidence that investors’ behaviour changed significantly after the financial crisis of 2008, which signalizes about the necessity of improving current asset pricing theory.