What Does the Cross-Section Tell About Itself? Explaining Equity Risk Premia with Stock Return Moments

We derive a parsimonious equilibrium three-factor asset pricing model (cross-sectional CAPM, CS-CAPM) in which the realized cross-sectional second and third moments of long-short equity portfolio returns are the driving forces in terms of pricing cross-sectional equity risk premia. Stock market segmentation implies that these two (nonmarket) factors are priced in equilibrium. The three-factor model offers a large fit for the joint cross-sectional risk premia associated with 26 prominent CAPM anomalies, with explanatory ratios around or above 40%. The CS-CAPM compares favorably with multifactor models widely used in the literature. The cross-sectional factors are not subsumed by traditional ICAPM risk factors.