| This research extends the work of Aggarwal and Schatzberg (1997), Aggarwal and Aggarwal (1993), Aggarwal, Rao, and Hiraki (1989), Lee and Wu (1985), and Beedles (1984), by investigating the factors pricing the third and fourth moments---coskewness and cokurtosis---also differ in stocks that differ in size, book to price, earnings to price, sales to price, liquidity and analyst following. Results indicate that significant statistical and economic differences exist. Trading strategies similar to Jegadeesh and Titman (1993, 2001) show that significant economic benefits arise by considering coskewness and cokurtosis. Such benefits could be either due to superior performance of trading strategies, or substantial savings in transaction costs. Results also indicate that if investors want to have more coskewness in their holding they should invest in AMEX or NASDAQ stocks that have small size, low book to price, high earnings to price, high liquidity and low analyst following. Investors can avoid cokurtosis in their holdings by investing in NYSE stocks that have large size, high book to price, high earnings to price, low sales to price, low liquidity, and high analyst following.; Hung (2004), Dittmar (2002), Fang and Lai (1997), Kraus and Litzenberger (1976), have shown that the factors pricing the third and forth moments---coskewness and cokurtosis---are significant determinants of portfolio returns. This research contributes to finance literature as it investigates whether coskewness and cokurtosis are also cross-sectional determinants of individual stock returns. Results show that although coskewness and cokurtosis are not significant cross-sectional determinants for all stocks returns, they are important for some stocks, especially stocks that have highly efficient information structure, or a narrow category of growth stocks, where coskewness and cokurtosis are large enough to make an impact on stock returns.; The measure of mutual fund performance suggested by Treynor (1965) is a two-moment framework. Thus, there exists a scope of performance misrepresentation. Mutual fund managers may show improved performance in a two-moment framework, while ignoring investor preferences for third and fourth moments. Results indicate this is the case especially for open-end stock funds that provide higher risk premium per unit of beta risk. |
