Abstract
The Capital Asset Pricing Model (CAPM) is one of the most used model in finance during the last five decades. This is despite heavy criticism against it along with an ongoing debate among academia about the empirical validity of the model. Three major extensions to the conventional model have been suggested; higher-moment CAPM, multi-factor model and conditional CAPM. All these models have shown mixed results in empirical studies. In the recent past, these extensions are integrated and tested for empirical validity and show some positive results (Vendrame, Tucker & Guermat, 2016). In this study, the empirical validity of conditional four-moment CAPM is tested on the Colombo Stock Exchange (CSE) of Sri Lanka. Individual stock returns on 74 listed companies covering a 17-year period from 2000 to 2016 are used. A two step procedure is followed with the estimation of the short window time series regressions in the first step, while cross-sectional regressions are estimated in the second step. Test results show inconclusive evidence about the conditional four-moment CAPM. Risk of coskewness is significant though risk of covariance and co-kurtosis are not significant explaining the average return on individual stocks on the CSE during the period under study.