International Journal of Management IT and Engineering

Two of the important conditions for the traditional CAPM to hold is that the expected market risk premium must be positive and that the security returns must follow the normal distribution. However, the validity of the traditional CAPM model is tested on realized returns rather than on expected return and the realized returns may be positive or negative. Further, many times the security returns do not the follow normal distribution. The current study aims at developing the model which incorporates higher moments (co-skewness and co-kurtosis) and also incorporates both rising and declining market in the same model. The model is tested for the Indian equity market. The results of the study describing the conditional relationship between co-moments and return show that only beta and co-skewness are priced in the Indian market and not the co-kurtosis. The results further indicate the asymmetric relationship between betas and return in up and down markets and symmetric relationship between co-skewness and return in up and down markets.