High-Order Moments In Stock Pricing: Evidence From The Chinese And Us Markets

Purpose The purpose of this paper is to introduce an augmented high-order capital asset pricing model (AH-CAPM) as a new risk-based model to price stocks.Design/methodology/approach The AH-CAPM is defined as a linear model with high-order marginal moments and co-moments from the joint distributions of the sorted stock portfolio returns and the market return.Findings The performance of the AH-CAPM is tested in the Chinese and US stock markets. Empirical results show that the high-order marginal moments and co-moments from the joint distributions in AH-CAPM contain the risk and return information implied by the Fama-French factors, indicating it as a better risk measurement. Moreover, the AH-CAPM performs better than the Fama-French three-factor model and the Carhart four-factor model in both the Chinese and US stock markets.Originality/value Overall, this study introduces a new asset pricing model with better measurements to incorporate risk information in the stock market.