Conventional and downside CAPM: The case of London stock exchange

Anna Rutkowska-Ziarko, Lesław Markowski, Christopher Pyke and Saqib Amin

Global Finance Journal, 2022, vol. 54, issue C

Abstract: Many studies on asset pricing have highlighted the importance of downside risk, in line with the actual losses of investors. In addition, the capital asset pricing model (CAPM), although presented as a universal theory, may provide significantly different rates of return in bull and bear markets. Using the CAPM under different conditions could be regarded as an alternative measurement and valuation approach to downside risk. This paper investigates conventional and downside approaches to risk taking into account different measures of downside beta coefficients. A further contribution of this research is the development of an alternative approach to testing the CAPM relationship. For this purpose, conditional relationships of the CAPM are proposed in which risk premiums are set separately in bull and bear periods. Using equity data and portfolios from the United Kingdom, we obtained positive and statistically significant downside risk premiums. We observed a slight advantage of downside measures over conventional beta measures. Conditional models provide evidence of a positive risk premium in rising markets and a negative risk premium in falling markets. The robustness analysis in subperiods indicates that these findings are largely unchanged for downside beta coefficients, which is not fulfilled by the model in a variance approach.

Keywords: Capital asset pricing model (CAPM); Conditional relationships; Downside beta; Lower partial moment (LPM); London stock exchange (LSE); Semivariance (search for similar items in EconPapers)
JEL-codes: C21 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:54:y:2022:i:c:s1044028322000618

DOI: 10.1016/j.gfj.2022.100759

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