An Investigation of Beta and Downside Beta Based CAPM-Case Study of Karachi Stock Exchange

Tahir, Mohammad; Abbas, Qaiser; Sargana, Shahid Mehmood; Ayub, Usman; Saeed, Syed Kashif

doi:10.2139/ssrn.2241416

Cited by 12 publications

(14 citation statements)

References 120 publications

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“…Moreover, the decile portfolios based on DSB (Table 3) clearly shows that a highest DSB portfolio (P10) yield higher average return than lowest DSB portfolio (P1) and the spread (P10-P1) of equal and value-weighted portfolio are significant as compare to portfolios based on CSK and CKT indicating that these portfolios significantly better explain the risk and return relationship as compared to their counterpart part portfolios on CSK and CKT. Our results are consistent with Estrada (2002), Post and Vilet (2004), Ang et al (2006) and Tahir et al (2013). To conclude it can be said that in Pakistan, DSB is an important risk factor that needs to be considered at the time of portfolio analysis.…”

Section: Descriptive Statisticssupporting

confidence: 90%

“…To achieve the purpose of this study, decile portfolios are constructed on the basis of co-skewness, co-kurtosis and downside beta and t-test results reveal that only DSB is efficiently priced in PSX and the other two risk measure (CSK and CKT) fail to yield abnormal average returns and cannot be considered as additional risk source that is priced in PSX. Estrada (2002), Post and Vilet (2004), Ang, Xing and Chen (2006), Javid and Ahmad (2011), Foong and Goh (2012), Tahir et al (2013) and Rashid and Hamid (2015) showed similar results in which they concluded that stocks that vary with the declining market are compensated with a high-risk premium for bearing downside risk. The results of time series and cross-sectional analysis also showed that CAPM does not significantly capture market risk premium and there is other risk measures also such as downside beta.…”

Section: Resultsmentioning

confidence: 82%

“…Hence, the above phenomena have initiated the integration of higher-moments and downside beta in the traditional capital asset pricing model. In Pakistan, various researchers such as Javid and Ahmad (2008), Javid and Ahmad (2011), Tahir, Abbas, Sargana, Ayub and Saeed (2013), Ayub, Shah and Abbas (2015) and Rashid and Hamid (2015) have tested higher co-moment and downside beta CAPM but their analysis is based on dataset of companies from selected sectors which result in a common problem of survivorship bias in portfolio management (see: Nagel, 2001). However, this paper provides more intensive results as it includes all companies of PSX.…”

Section: Introductionmentioning

confidence: 99%

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Higher Co-Moments and Downside Beta in Asset Pricing

Chhapra¹,

Kashif²

2019

AAMJAF

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The Capital Asset Pricing Model (CAPM) assumes a linear relationship between an asset's return and financial market. However, empirical invalidity of linearity of returns has given birth to other CAPM models. Therefore, this study aims to examine the implication of preference by a risk-averse investor for higher moments and downside risk as investors are assumed to be prudent, temperate and cautious and prefer firms with negative coskewness, positive co-kurtosis, and downside risk as they yield higher risk premium. To empirically test these theoretical assumptions data of all 901 firms (listed and delisted) in Pakistan Stock Exchange (PSX) from 2000 to 2016 have been used. Decile portfolios are constructed for cross-sectional and time series analysis. Generalized Method of Moments (GMM) and Wald Test are applied to check the robustness of results. The results indicate that co-skewness, co-kurtosis and downside beta are important risk factors but only downside beta is genuinely priced over and above what co-variance risk can explain and CAPM does not significantly capture market risk premium indicating the existence of other risk measures in PSX. The findings can help investors in formulating investment strategies for constructing well-diversified and efficient portfolios and can enable firm managers to take appropriate capital budgeting decisions by appropriately costing equities.

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Section: Descriptive Statisticssupporting

confidence: 90%

Section: Resultsmentioning

confidence: 82%

Section: Introductionmentioning

confidence: 99%

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Higher Co-Moments and Downside Beta in Asset Pricing

Chhapra¹,

Kashif²

2019

AAMJAF

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“…The beta/downside beta of the previous year was used as the instrumental variable. To address the problem of heteroscedasticity and the autocorrelation problem, this study used the Newey-West estimators adjusted for ordinary least squares (OLS), which correct for both heteroscedasticity and autocorrelation [40].…”

Section: Addressing Econometric Issuesmentioning

confidence: 99%

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

et al. 2020

Self Cite

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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.

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“…Second, we contribute to the literature on downside beta. Post and Van Vliet (), Ang, Chen, and Xing (), and Tahir, Abbas, Sargana, Ayub, and Saeed () report that the downside risk based CAPM outperforms the standard, variance‐based CAPM.…”

Section: Introductionmentioning

confidence: 99%

Option‐implied betas and the cross section of stock returns

Harris

Qiao

2018

Journal of Futures Markets

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We investigate the cross‐sectional relationship between stock returns and a number of measures of option‐implied beta. Using portfolio analysis, we show that the method proposed by Buss and Vilkov (2012, The Review of Financial Studies, 2525, 3113–3140) leads to a stronger relationship between implied beta and stock returns than other approaches. However, using the Fama and MacBeth (1973, Journal of Political Economy, 8181, 607–636) cross‐section regression methodology, we show that the relationship is not robust to the inclusion of other firm characteristics. We further show that a similar result holds for implied downside beta. We, therefore, conclude that there is no robust relation between option‐implied beta and returns.

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An Investigation of Beta and Downside Beta Based CAPM-Case Study of Karachi Stock Exchange

Cited by 12 publications

References 120 publications

Higher Co-Moments and Downside Beta in Asset Pricing

Higher Co-Moments and Downside Beta in Asset Pricing

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

Option‐implied betas and the cross section of stock returns

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