A higher-moment CAPM of Korean stock returns

The traditional Capital Asset Pricing Model (CAPM) developed by Sharpe, Lintner and Mossin is based on the strong assumption of normally distributed returns among other restrictions. However, especially in emerging stock markets, returns often deviate from normality, even though the series are of lower frequency. This paper extends upon the traditional framework of the expected equilibrium return of Korean stocks by incorporating higher order moments in order to explain their risk-return characteristics. Empirical evidence shows that a higher-moment CAPM increases the explanatory power of the return generating process. Particularly, in up-market phases, where the return on the market portfolio exceeds the risk-free interest rate, expected return, covariance, co-skewness and co-kurtosis are related.