No-arbitrage conditions and expected returns when assets have different β’s in up and down markets

Peter Xu () and Rich Pettit
Additional contact information
Peter Xu: Quantitative Management Associates LLC

Journal of Asset Management, 2014, vol. 15, issue 1, No 5, 62-71

Abstract: Abstract We present a model of expected returns when assets have different β’s in up and down markets. Using no-arbitrage argument, we show that upside and downside β’s are priced separately, and their risk premiums can be expressed in terms of the price and expected payoff of a call and a put option, respectively, on the market index. For the upside β, the higher the price of the call option relative to its expected payoff, the smaller the risk premium; but for the downside β, the higher the price of the put option relative to its expected payoff, the larger the risk premium. Our model provides a useful perspective on what systematic risks are and how they are priced. Empirical evidence shows that contemporaneous stock returns are strongly correlated with downside β’s, but weakly correlated with upside β’s.

Keywords: downside risk; upside and downside β’s; risk premiums (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/jam.2014.9 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:assmgt:v:15:y:2014:i:1:d:10.1057_jam.2014.9

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41260

DOI: 10.1057/jam.2014.9

Access Statistics for this article

Journal of Asset Management is currently edited by Marielle de Jong and Dan diBartolomeo

More articles in Journal of Asset Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().