The purpose of this note is to examine, theoretically, why the market risk premium (R^_ g\ raa y influence tests of asset pricing models with higher moments. When moments of higher order than the variance are added to a pricing model developed within the usual two-fund separation assump- tions, the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment's coefficient.

The purpose of this note is to examine, theoretically, why the market risk premium (R^_ g\ raa y influence tests of asset pricing models with higher moments.When moments of higher order than the variance are added to a pricing model developed within the usual two-fund separation assump- tions, the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment's coefficient.Unless this nonlinearity is recognized, incorrect conclusions regarding the tests of such models may result.