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

• Main Authors: Rashmi Chaudhary, Dheeraj Misra, Priti Bakhshi
• Format: Article
• Language: English
• Published: LLC "CPC "Business Perspectives" 2020-07-01
• Series: Investment Management & Financial Innovations
• Subjects: beta; co-kurtosis; co-skewness; panel data analysis; return; variance
• Online Access: https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/13717/IMFI_2020_02_Bakhshi.pdf
• ISSN: 1810-4967; 1812-9358

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.