The fama and french model with co-skewness and co-kurtosis

Abstract

The purpose of this thesis is by using the methodology proposed by Daniel Chi-Hsiou Hung, Mark Shacleton and Xinzhong Xu (2004) to examine the significance of an extended model based on Fama and French multifactor model for asset pricing This thesis examines determinants of the cross-section of portfolio returns from CAPM beta and other strategies based on value and size. It does so using two recent developments in the literature, using higher order asset pricing models that encompass systematic risks above the traditional CAPM beta covariance. The second development is the use of the up and down markets theory in the model. It is quite common that the returns on stocks do not follow a normal distribution but have skewness and kurtosis. This has not been widely researched in the past literature especially with the use of the Fama and French factors of value and size. It is important to note that the thesis consists of two main parts. The first part is theoretical and consists of all the notions and knowledge that is needed for the reader to understand the second part of the thesis. The second part consists of the empirical procedure that is needed in order to examine the model proposed.