A GMM Test of the Three-moment CAPM in the Australian Equity Market

In this paper the three-moment capital asset pricing model (TMCAPM) is tested using a sample of Australian equity returns over the thirty-year period 1963-1992. Specially, the tests are performed using a direct optimisation of nonlinear restrictions in a generalised method of moments (GMM) framework. In general, the results are quite mixed. While in several test periods, the TMCAPM could not be rejected, in others strong rejections were observed. The mixed nature of the results are reinforced by some ancillary observations regarding the relationship between estimates of market skewness; the price of gamma; and the marginal rate of substitution of skewness for variance.