Higher moments and beta asymmetry: evidence from Australia

We examine whether systematic higher moments capture beta asymmetry in an asset pricing model whereby the conditional beta of a risky asset increases (decreases) during a bear (bull) market state. We first provide a simple conceptual outline from the microeconomic literature to show that beta asymmetry is driven by time‐varying higher‐order risk preferences (prudence and temperance) across different market states. We then empirically relate these higher‐order risk preferences to systematic skewness and systematic kurtosis. We find that beta asymmetry in Australian stock returns cannot be explained by Carhart (1997) 4‐factor model but is subsumed by systematic higher moments.