Co-Skewness and Capital Asset Pricing

In an earlier paper, Kraus and Litzenberger presented a 3-parameter capital asset pricing model (CAPM) which extended the Sharpe-Lintner capital asset model to incorporate the effects of skewness on asset prices. They concluded that 1. co-skewness in addition to co-variance is required to explain the returns on individual risky assets, and 2. the implied riskless market rate of return is not significantly different from the actual risk-free rate of return. The analysis provides some but not conclusive evidence in support of the first of these propositions, suggesting that investors may be willing to pay a premium for positive skewness in their portfolios. However, the tests provide no support for the second of their conclusions, so it is concluded that the Kraus-Litzenberger attempt to develop and substantiate a modified form of the Sharpe-Lintner capital asset pricing model is not successful.