Higher Co-Moments and Downside Beta in Asset Pricing

Chhapra, Imran Umer; Kashif, Muhammad

doi:10.21315/aamjaf2019.15.1.6

Cited by 7 publications

(4 citation statements)

References 71 publications

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“…Downside beta turned out to be a more appropriate measure of systematic risk than the conventional beta coefficient in explaining the cross-section of portfolio returns. This conclusion was supported by, among others, Estrada (2007), Ang et al (2006) and Chhapra & Kashif (2019). They confirmed that downside beta is a better predictor of portfolio returns than conventional beta.…”

Section: Research Contributionsupporting

confidence: 52%

Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

Markowski

2020

JEM

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Aim/purpose-The purpose of the research is to verify the Capital Asset Pricing Model (CAPM) in the Polish capital market based on a conventional and downside risk approach. Design/methodology/approach-The author in this study, using individual securities and portfolios, compares the unconditional risk-return relationships with the conditional risk, estimated in up and down market using realised returns in cross-sectional regressions. Except for a beta coefficient, the CAPM is tested with co-skewness as a higher order co-moment and downside betas as a risk measure in a downside approach. Findings-The unconditional regressions give evidence of existing risk premium associated with co-skewness and downside beta, and confirmed the validity of the downside CAPM. The author, based on conditional relations, found that risk-return relations depend on the state of the stock market. The average premium for systematic risk in term of beta coefficient is significantly positive in up market periods and significantly negative in down market periods. The use of conditional models did not explicitly confirm the suitability of co-skewness in asset pricing. Research implications/limitations-The main implications include the fact that the conventional beta coefficient is an appropriate risk measure when we consider using it separately for up and down market. A valuable extension of this research would be a benchmarking analysis to compare results for the Polish capital market against other emerging and developed markets. Originality/value/contribution-The author in this paper proposes an alternative approach to testing risk-return relationships based on the CAPM in comparison to commonly used tests founded upon joint estimations of these relationships in periods of both positive and negative market excess return. The noteworthy contribution of this study is an application of the downside beta coefficient and the co-skewness coefficient in crosssectional regressions.

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Section: Research Contributionsupporting

confidence: 52%

Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

Markowski

2020

JEM

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“…On the other hand, Hung et al (2004) have empirically proved that comoments were insignificant. Similar conclusions regarding co-kurtosis emerge from research on the Karachi stock exchange (Javid, 2009;Chhapra & Kashif, 2019). Ambiguous results regarding the valuation of higher moments were reported by Akbar and Nguyen (2016).…”

Section: Literature Reviewsupporting

confidence: 69%

Conventional and downside CAPM with higher-order moments: Evidence from emerging markets

Markowski

2024

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Research background: Conventional CAPM is a well-known and tested theory on various capital markets. It was also repeatedly rejected as a model of capital pricing. This article proposes a different approach to both CAPM testing and the use of other risk measures. In addition, research is global, including emerging countries. Purpose of the article: This paper investigates the standard CAPM, and this model is based on higher moments of the return distribution for the global emerging market. In addition, this paper aims to compare the conventional and downside CAPM versions using the beta coefficient and co-moments. Methods: Contrary to the classical unconditional tests for the risk premium, conditional relationships are also estimated considering the market portfolio condition. Moreover, the studies considered conventional and downside approaches to risk measures. The cross-sectional regressions are based on the Fama-MacBeth (F-M) procedure and panel models. Findings & value added: The findings contribute to the debate on whether beta coefficient and higher order co-moments in conventional and downside approaches can explain the cross-sectional emerging indices returns. The unconditional models using all measures do not significantly describe the cross-sectional volatility of returns. The cross-sectional regressions in up and down-market based on both the classic F-M procedure and panel models show that the beta and co-kurtosis risk premium is significant and depends on market conditions. The risk premium for co-skewness is not valid, and the direction of the relationships is opposite than expected. Research also demonstrates that the test results of CAPM relationships are not robust to the presence of outliers and shocks resulting from the Covid-19 pandemic in the context of risk-return space. Research provides strong support for the importance of downside risk in the context of standard CAPM and, above all, higher co-moments.

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“…Moreover, they argued that the relationship between downside risk and future returns was strongly negative at the portfolio level but relatively flat at the stock index level. Chhapra & Kashif (2019) employed a dataset of 901 firms on the Pakistan Stock Exchange from 2000 to 2016 to investigate the implications of risk-averse investor preferences for higher moments and downside risk. They argued that investors favored firms exhibiting negative co-skewness, positive co-kurtosis, and downside risk because they yielded a higher risk premium.…”

Section: Literature Reviewmentioning

confidence: 99%

A comparative study of the CAPM and extended models in the Indian stock market

Asthana,

Ahmed

2024

Braz. J. of Sci.

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To explain the cross section of asset returns, there are numerous asset pricing models being used which require ideal conditions in the markets around the world. An attempt has been made in the present study to estimate and compare the different versions of capital asset princing model (CAPM) using the data of sectoral indices listed in S&P BSE in the Indian stock market. The two widely used approaches i.e. Fama-MacBeth (1973) and Pettengil et al. (1995) for conditional versions have been adopted in the study. The models were compared on the basis of Akaike Information Criterion (AIC) and it was obtained that the AIC value of the Unconditional higher moment CAPM was obtained minimum among other models. Hence it can be said as the better model than other models estimated.

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Higher Co-Moments and Downside Beta in Asset Pricing

Cited by 7 publications

References 71 publications

Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

Conventional and downside CAPM with higher-order moments: Evidence from emerging markets

A comparative study of the CAPM and extended models in the Indian stock market

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