CAPM, higher co-moment and factor models of UK stock returns

In this paper we examine the variables that explain the cross-section of UK stock returns. Previous studies have found that the CAPM beta has moderate or even insignificant explanatory power once the Fama French factors are included. However, we control for different realised risk premia in up and down markets by using the same methodology as Pettengill, Sundaram and Mathur (1995). Unlike previous work, we find that beta is highly significant in explaining the cross-section of UK stock returns and more importantly remains significant even when the Fama French factors are included in the cross-sectional regressions. We also investigate whether higher co-moments (co-skewness and co-kurtosis) have any explanatory power but find that empirical support is weaker