Asset pricing when returns are nonnormal: Fama-French factors versus higher-order systematic comoments

A growing literature contends that, since returns are not normal, higherorder comoments 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 higherorder comoments. Using portfolio returns over various time horizons, we show that adding a set of systematic comoments (but not standard moments) of order 3-10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case.