Conditional relation between return and co-moments – an empirical study for emerging Indian stock market

  • Received May 28, 2020;
    Accepted June 25, 2020;
    Published July 2, 2020
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.17(2).2020.24
  • Article Info
    Volume 17 2020, Issue #2, pp. 308-319
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Due to many theoretical and practical shortcomings of the traditional CAPM model, this study aims at analyzing the CAPM with possible extensions. The analysis aims to know the empirical soundness of Conditional Higher Moment CAPM in emerging India’s capital market. The sample consists of 69 company’s daily stock price data from April 2004 to March 2019 from NSE 100. Panel data analysis is used on 21 cross-sections. The overall results show that when both up and down markets are incorporated separately, all three moments, namely, co-variance, co-skewness, and co-kurtosis, are priced during the normal Indian economy phase. Further, this study states that including higher moments (co-skewness and co-kurtosis) in the two-moment model provides symmetry in both the up and down markets. This is one of the first studies in the Indian Stock market explaining the variation in portfolio returns through panel data analysis by extending CAPM with conditional higher-order co-moments. The portfolio managers should consider skewness and kurtosis along with variance in constructing the optimal portfolios.

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    • Table 1. Summary statistics of portfolio return distributions (first testing period – from April 2009 to March 2014)
    • Table 2. Summary statistics of portfolio return distributions (second testing period – from April 2014 to March 2019)
    • Table 3. Estimates of risk premium in conditional pricing models
    • Table 4. Estimates of risk premium in conditional pricing models
    • Table 5. Test for symmetry between co-moments and returns in up and down markets
    • Conceptualization
      Rashmi Chaudhary, Dheeraj Misra, Priti Bakhshi
    • Formal Analysis
      Rashmi Chaudhary, Dheeraj Misra, Priti Bakhshi
    • Investigation
      Rashmi Chaudhary, Priti Bakhshi
    • Methodology
      Rashmi Chaudhary, Dheeraj Misra
    • Project administration
      Rashmi Chaudhary, Priti Bakhshi
    • Software
      Rashmi Chaudhary
    • Supervision
      Rashmi Chaudhary, Dheeraj Misra
    • Validation
      Rashmi Chaudhary, Dheeraj Misra
    • Visualization
      Rashmi Chaudhary, Dheeraj Misra
    • Writing – original draft
      Rashmi Chaudhary, Priti Bakhshi
    • Writing – review & editing
      Rashmi Chaudhary, Dheeraj Misra, Priti Bakhshi
    • Data curation
      Priti Bakhshi