Dichotomous Asset Pricing Model

Liang Zou ()
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Liang Zou: University of Amsterdam

Annals of Economics and Finance, 2005, vol. 6, issue 1, 185-207

Abstract: Cross-asset derivative securities are studied and a dichotomous asset pricing model (DAPM) is derived that significantly enriches the Sharpe-Lintner-Black capital asset pricing model. An assets beta is shown to be observable ex ante through the price of its cross-market call or put, and the DAPM separately predicts the assets' expected return - beta relations under the upper-market and lower-market conditions. A sufficient condition for the DAPM to hold is that assets return distributions satisfy Ross' (1978) two-fund separation property, which implies that any well-diversified portfolio is both mean-variance and gain-loss efficient.

Keywords: Mean-variance; Gain-loss; Upper-market beta; Lower-market beta; Cross-asset derivative security; Dichotomous asset pricing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2005:v:6:i:1:p:185-207

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