Average Drawdown Risk and Capital Asset Pricing

Mohammad Reza Tavakoli Baghdadabad () and Paskalis Glabadanidis ()
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Mohammad Reza Tavakoli Baghdadabad: Department of Management, Islamic Azad University, Science and Research Branch, Hesarak, Tehran, Iran 1477893855, Iran
Paskalis Glabadanidis: Finance Discipline, University of Adelaide Business School, Level 12, 10 Pulteney Street, Adelaide SA 5005, Australia

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2013, vol. 16, issue 04, 1-21

Abstract: Practitioners and academics have spent the past few decades debating the validity and relevance of the capital asset pricing model (CAPM). One of the attributes of the model is an estimate of risk by beta, which in equilibrium describe the behavior of mean-variance (MV) investors. In the MV framework, risk is measured by the variance of returns which is a questionable and restrictive risk measure. In contrast, the average drawdown risk is a more acceptable risk measure and can be applied to modeling an alternative behavioral hypothesis, namely mean-drawdown behavior with a replacement risk measure for diversified investors, the average drawdown beta leading to an alternative pricing model based on this beta. Our findings clearly support the average drawdown beta and the pricing model of average drawdown CAPM versus the conventional beta and CAPM in a sample of Malaysian mutual funds.

Keywords: Mean-variance behavior; mean-drawdown behavior; drawdown risk measure; average drawdown risk measure; average drawdown beta; CAPM; average drawdown CAPM; G11; G12 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1142/S0219091513500288

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