An Empirical Analysis of Higher Moment Capital Asset Pricing Model for Bangladesh Stock Market

Capital Asset Pricing Model (CAPM) describes a relationship which is linear between expected return and risk of an asset. Within the contents of this paper, the higher moments of return distributions for companies listed in the Dhaka Stock Exchange (DSE) market have been inspected for the period of January 2005 to December 2009. The mean-variance CAPM model is extended by taking higher moments-Skewness and Kurtosis. Monthly stock returns from 80 non-financial companies, covering ten sectors (Engineering, Food & Allied, Fuel & Power, Textile, Pharmaceuticals, Services & Real Estate, Cement, Tannery, Ceramic and Miscellaneous) are studied in this research. From the empirical analysis, it is observed that the intercept term is significantly different from zero and insignificant relationship between beta and excess returns both in mean-variance CAPM and higher moment CAPM conditions. This means that the market excess returns provide no explanation for the asset rate of return, whether or not third and fourth moments are considered in the regression model. But, when the higher moments are introduced, the adjusted R-square increases 0.037 to 0.257. It is noticed that the risk premium for co-skewness risk is positive for the period 2005-2009, indicating that the co-skewness risk is compensated in the DSE market for the studied period. Also, the co-kurtosis risk is rewarded by the market. Thus, in describing risk-return relationship in emerging markets like Bangladesh stock market, the higher moment CAPM performs comparatively well.