Asset Pricing When Returns are Nonnormal : Fama-French Factors vs. Higher-Order Systematic Co-Moments

A growing literature contends that, because returns are not normal, higher-order co-moments matter to risk-averse investors. Fama and French (1993, 1995) find that nonmarket risk factors based on size and book-to-market ratio are priced by investors. We test the hypothesis that the Fama-French factors simply proxy for the pricing of higher-order co-moments. Using portfolio returns over various time horizons, we show that adding a set of systematic co-moments (but not standard moments) of order 3 through 10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case