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- Title
RISK RETURN AND THE MULTI-DIMENSIONAL SECURITY PRICING MARKET.
- Authors
Schweser, Carl; Schneeweis, Thomas
- Abstract
This article reviews the apparent overpricing of stocks using the model developed by Alan Kraus and R.H. Litzenberger (K/L) and to study the relationships between standard deviation and systematic skewness. As a testable model, it exhibits some basic empirical problems. First, a high degree of multicollinearity exists between beta and gamma. In their study, K/L report a correlation of .95 between beta and gamma. This high degree of correlation makes it difficult to use both beta and gamma in the same equation, especially if the objective is to exhibit the actual impact of beta and the additional effect of gamma. Secondly, in tests performed by K/L, the securities were grouped into portfolios. A verbal interpretation of the K/L model would explain these signs as follows. The presence of positive systematic skewness, gamma, in a security implies that the security reacts in the same direction as the market for extreme changes in holding period returns. A negatively skewed market index is one that exhibits extreme market movements in the direction of falling holding-period returns. Therefore, when the market index exhibits negative skewness, securities with positive systematic skewness will share in the adverse movements of the market in proportion to the degree systematic skewness exhibited by the security.
- Publication
Journal of Financial Research, 1980, Vol 3, Issue 1, p23
- ISSN
0270-2592
- Publication type
Academic Journal
- DOI
10.1111/j.1475-6803.1980.tb00034.x