scholarly journals Downside CAPM: The case of South Africa

2017 ◽  
Vol 9 (2) ◽  
pp. 578-608
Author(s):  
Kwasi Okyere-Boakye ◽  
Brandon O’Malley
Keyword(s):  
Asset Pricing ◽  
Risk Measures ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Risk Framework ◽  
Measures Of Risk

Beta and the capital asset pricing model have traditionally been the preferred measures of risk. However, there is growing literature against the use of the capital asset pricing model to determine the cost of equity in markets, such as emerging markets, where investors display mean-semivariance behaviour and, where share returns are non-normal and asymmetric. Downside risk measures such as semideviation, downside beta and the downside capital asset pricing model have been found to be plausible alternate measures of risk. This study investigates empirically the relationship between risk and return in a downside risk framework and a regular risk framework using returns on companies listed on the JSE Securities Exchange. The empirical evidence from this study indicates that while downside beta and semideviation significantly explain the variation in returns, they do not support them as being more appropriate measures of risk over beta and standard deviation.

scholarly journals Downside Beta and Downside Gamma: In Search for a Better Capital Asset Pricing Model

Risks ◽  
2021 ◽  
Vol 9 (12) ◽  
pp. 223
Author(s):  
Madiha Kazmi ◽  
Umara Noreen ◽  
Imran Abbas Jadoon ◽  
Attayah Shafique
Keyword(s):  
Asset Pricing ◽  
Risk Measures ◽  
Risk Measure ◽  
Factor Loading ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Significance Level ◽  
Asset Pricing Model

In the financial world, the importance of “downside risk” and “higher moments” has been emphasized, predominantly in developing countries such as Pakistan, for a substantial period. Consequently, this study tests four models for a suitable capital asset pricing model. These models are CAPM’s beta, beta replaced by skewness (gamma), CAPM’s beta with gamma, downside beta CAPM (DCAPM), downside beta replaced by downside gamma, and CAPM with downside gamma. The problems of the high correlation between the beta and downside beta models from a regressand point of view is resolved by constructing a double-sorted portfolio of each factor loading. The problem of the high correlation between the beta and gamma, and, similarly, between the downside beta and downside gamma, is resolved by orthogonalizing each risk measure in a two-factor setting. Standard two-pass regression is applied, and the results are reported and analyzed in terms of R2, the significance of the factor loadings, and the risk–return relationship in each model. The risk proxies of the downside beta/gamma are based on Hogan and Warren, Harlow and Rao, and Estrada. The results indicate that the single factor models based on the beta/downside beta or even gamma/downside gamma are not a better choice among all the risk proxies. However, the beta and gamma factors are rejected at a 5% and 1% significance level for different risk proxies. The obvious choice based on the results is an asset pricing model with two risk measures.

scholarly journals Downside Risk-Based Six-Factor Capital Asset Pricing Model (CAPM): A New Paradigm in Asset Pricing

2020 ◽  
Vol 12 (17) ◽  
pp. 6756
Author(s):  
Usman Ayub ◽  
Samaila Kausar ◽  
Umara Noreen ◽  
Muhammad Zakaria ◽  
Imran Abbas Jadoon
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Five Factor Model ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Effective Manner

The importance of downside risk cannot be denied. In this study, we have replaced beta in the five-factor model of using downside beta and have added a momentum factor to suggest a new six-factor downside beta capital asset pricing model (CAPM). Two models are tested—a beta- and momentum-based six-factor model and a downside-beta- (proxy of downside risk) and momentum-based six-factor model. Beta and downside beta are highly correlated; therefore, portfolios are double-sorted to disentangle the correlation. Factor loadings, i.e., size, value, momentum, profitability, and investment, are constructed. The standard methodologies are applied. Data for sample stocks from different non-financial sectors listed in the Pakistan Stock Exchange (PSX) are taken from January 2000 to December 2018. The PSX-100 index and three-month T-bills are taken as proxies for market and risk-free returns. The study uses three subsamples for robustness—period of very high volatility, period of stability, and period of stability and growth with volatility. The results show that the value factor is redundant in both models. The momentum factor is rejected in the beta-based six-factor model only. The beta-based six-factor model shows very low R2 in periods of highly volatility. The R2 is high for the other periods. In contrast, the downside beta six-factor model captures the downside trend of the market in an effective manner with a relatively high R2. The risk–return relationship is stronger for the downside beta model. These reasons lead us to believe that, overall, the downside beta six-factor model is a better option for investors as compared to the beta-based six-factor model in the area of asset pricing models.

scholarly journals The measurement of risk

1984 ◽  
Vol 15 (4) ◽  
pp. 205-211 ◽  
Author(s):  
J. L.R. Retief ◽  
W. D. Hamman ◽  
J. F. Affleck-Graves
Keyword(s):  
Asset Pricing ◽  
Decision Processes ◽  
Capital Asset Pricing Model ◽  
Share Price ◽  
Financial Statement ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Measures Of Risk

Risk has so permeated the financial community that no one needs to be convinced of the necessity of including risk in investment analysis. Although the accounting profession has accepted that the purpose of accounting is to facilitate decision-making, implementation of this approach within financial-statement preparation has been impeded by an inability to specify the decision processes of external users of accounting data. Past research, however, provides some empirical knowledge of the decision processes of the investor in a company's shares. This study extends that research in terms of its implications for accounting. The accounting system generates information on several relationships considered by many to be measures of risk. Previous research suggests that financial-statement ratios can be used as measures of default risk, but little is known of their association with risk as defined by the beta coefficient in the capital asset pricing model, generally known as the market model. The problem is compounded by the fact that the capital asset pricing model specifies its risk measures solely in terms of market interactions (i.e. share price variables). An important issue is the relationship between the accounting-determined and market-determined measures of risk. This article investigates this relationship, utilizing a sample of companies from the Johannesburg Stock Exchange, and compares results with those of similar studies conducted in the USA.

scholarly journals The Myth of Downside Risk Based Capital Asset Pricing Model: Empirical Evidence from South Asian Countries

2018 ◽  
Vol III (III) ◽  
pp. 265-280
Author(s):  
Syed Aziz Rasool ◽  
Adiqa Kausar Kiani ◽  
Noor Jehan
Keyword(s):  
Asset Pricing ◽  
South Asian ◽  
Equity Markets ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Asian Countries ◽  
Capital Asset ◽  
Asset Pricing Model

The study aims to empirically investigate the applicability of the downside risk based Capital Asset Pricing Model (CAPM) for four south Asian countries e.g. Bangladesh, India, Pakistan and Sri Lanka. Fama-MacBeth methodology is used for monthly data from January 2007 to December 2017. The results partially supported the predictors of the model for all the four equity markets and can be concluded that the downside risk based CAPM better suits the emerging equity markets. All market players may be benefited with the results concluded in the study. The region have large similarities and the setup of the equity markets is also quite identical, making them suitable for an integrated stock market.

scholarly journals Custo de capital próprio em mercados emergentes: uma abordagem empírica no Brasil com o downside risk

2010 ◽  
Vol 11 (1) ◽  
pp. 92-116 ◽  
Author(s):  
Graziela Xavier Fortunato ◽  
Luiz Felipe Jacques da Motta ◽  
Giuseppe Russo
Keyword(s):  
Asset Pricing ◽  
Cross Section ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model

Este artigo visa testar empiricamente a proposta de Estrada (2000) para as empresas que compõem o Ibovespa, avaliando se para mercados emergentes existem outras medidas de risco sistemático diferentes do beta do capital asset pricing model (CAPM). Dessa forma, testou-se o downside risk que capta a parte negativa do retorno. Além de dados em cross section, utilizaram-se dados em painel, como uma contribuição adicional ao trabalho de Estrada (2000). Os resultados encontrados não confirmam que o downside risk seja uma medida apropriada ao mercado brasileiro. Outras medidas de risco apresentaram melhor correlação com o retorno, permitindo o cálculo do custo de capital com valor diferente daquele obtido pela aplicação do beta. De acordo com Estrada (2000), os resultados sugerem que os mercados emergentes estão em posição intermediária entre os mercados integrados e segmentados, tal como confirmado para o mercado brasileiro.

Sign in / Sign up

Export Citation Format

Share Document