Four-Moment Asset Pricing Model: Computation Standards and specification Tests for Moment-Related Risk Premia

This paper contributes to the literature on systematic co-moments in stock returns by documenting the effects of non-diversified variance, skewness, and kurtosis on asset valuation during the period 1996-2006. Through a methodology similar to that of Fama and French (1993), we derive premia able to capture the shared variation in US stock returns related to the aforementioned three measures of risk recognized by the Positive Preference Theory. Our study elaborates on the intuition that the Fama-French (1993) and Carhart (1997) empirical factors would constitute proxies for asset systematic co-moments with the market aggregate. We, therefore, develop a comprehensive framework able to price commonly risk aversion both towards market variables such as size, book-to-market ratio, and momentum and towards these systematic co-moments. Even if the empirical risk factors and the market premium pick up free variation in returns, we infer from them the pricing related to the first four moments.