European Journal of Social Sciences – Volume 21, Number 2 (2011)

From Regular-Beta CAPM to Downside-Beta CAPM

Qaiser Abbas
Corresponding Author, Professor Department of Management Sciences COMSATS Institute of
Information Technology Chak Shahzad, Park Road, Islamabad
E-mail: qaisar@comsats.edu.pk

Usman Ayub
Assistant Professor and PhD Scholar COMSATS Institute of Information Technology
Chak Shahzad, Park Road, Islamabad
E-mail: usman_ayub@comsats.edu.pk

Shahid Mehmmod Sargana

Assistant Professor, COMSATS Institute of Information Technology
Chak Shahzad, Park Road, Islamabad

Syed Kashif Saeed

PhD Scholar, COMSATS Institute of Information Technology
Chak Shahzad, Park Road, Islamabad

Abstract
CAPM has come a long way and has passed the time-test and eventually is fast coming out
as a winner despite the onslaught of both, APT and multi-factor CAPM. The bottom line is
that CAPM is needed, dead or alive. If so, it does not mean that CAPM stays as “CAPM”.
Downside risk in recent times has caught the eyes of researchers. Downside-beta CAPM
(DCAPM) based on downside risk is being thought a fast replacement to CAPM. It
captures almost all the features of CAPM but let goes conditions of normality and
investor’s preference of both upside and downside risk. With evidence pouring in from all
corners of the world especially from emerging markets, that DCAPM and its different
modified versions outperforms CAPM, it seems that DCAPM is long-awaited solution for
asset pricing problem.

Keywords: CAPM, anomalies, DCAPM, Value at Risk (VaR).

Section I: Introduction
The paper is one of its kinds that makes its journey back into history with the inception of CAPM and
concludes with Downside-beta CAPM (DCAPM) based on downside risk, bringing the two worlds
together. At least to our knowledge, CAPM and DCAPM have not been discussed simultaneously at
great length, in one paper. The paper primarily focuses on empirical evidence for and against CAPM.
Though these evidences are discussed in many papers but this paper categorizes the criticism which
makes it easier for readers to retain it. As regarded by many, CAPM is still a solution in asset pricing
whose acceptability and worldwide usage cannot be easily discarded. So relying on the same
theoretical basis of CAPM, apart from the condition of normality and investor’s preference of both
upside and downside risk, DCAPM comes to rescue with hard evidence. Evidence of DCAPM both
from developed and emerging markets is discussed in this paper. The paper also discusses the modified
versions of both CAPM and DCAPM, incorporating higher moments and time-varying betas.
189
Electronic copy available at: http://ssrn.com/abstract=1866129
 European Journal of Social Sciences – Volume 21, Number 2 (2011)

The paper is divided into four sections. The first section gives an introduction while second
section presents a brief introduction of CAPM covering primarily the empirical arena of CAPM.
Initially, evidence in favor of CAPM is given and then the onslaught on CAPM is discussed. The
criticism on CAPM is divided into three major categories. As a savior, downside risk is brought in and
CAPM is transformed into DCAPM. Third section starts with the introduction to downside risk and
ends up with evidence of DCAPM worldwide with emphasis on emerging markets. Finally, fourth
section is conclusion and further recommendations.

Section II. I: Introduction to CAPM

Capital Asset pricing Model (CAPM)1 is one of the most, theoretically and empirically, discussed
topics in the discipline of economics and finance. Although it cannot be called an empirical success,
it’s intuitively brevity has provided it a special place in literature of economics and finance. Due to
above discussed attributes; it is widely used2 asset pricing model. Its simplicity and cost-effectiveness
makes it superior to both multi-factor and arbitrage models. Although there are no prices on graph-only
risk and return, still it is called a ‘pricing model’ because it can be used to help us determine
appropriate prices for securities in the market.
CAPM, based on Markowitz’s Mean-Variance (MV) Approach (1952) and Tobin (1958) Two-
Fund Separation theorem under the conditions of market equilibrium, employs that more expected
return accompanies with more expected risk having linear risk-return relationship on efficient
portfolios as portrayed by Capital Market Line (CML). CML is sum of the return for delaying
consumption and a premium for bearing the risk inherent in the portfolio in one-period investment
decision that can be written as:
 E ( RP ) − R f 
E ( RP ) = R f + σ P  
 σm 
Where E ( RP ) is expected return on portfolio; R f is the risk free rate available in market.
CAPM can be graphically represented using Security Market Line (SML). It displays the
expected rate of return of an individual security or portfolio in terms of risk-free rate and relative risk
of a security or portfolio as a function of non-diversifiable risk, commonly known as beta. The beta can
be determined by regressing, holding period returns of the security against the returns on the overall
market and can be shown as following:
E (Ri) = R f + β im [E (R m ) − R f ]
σ i ri m c o v ( ri , r m )
β im = =
σ m v a r ( rm )
Where E ( Ri ) is expected return on security i, E ( Rm ) is the expected return on market portfolio,
R f is the risk free rate and β im is the volatility of security i with respect to market portfolio m.

Section II.II: All was Well for CAPM

Early tests, in seventies, for CAPM and areas of association reinforcing CAPM are in favor of CAPM
theory. It seems that CAPM has solved centuries’ old problem as how to price an asset and seem to be
building blocks for one of the most important discoveries in financial markets3. Research evidences

1
CAPM is independently developed by Sharpe (1964), Lintner (1965), Mossin (1966) & Treynor1 (1962). Arguably
Treynor is the pioneer for CAPM but his first paper “Toward a Theory of Market Value of Risky Assets” (1962) was not
published until 1999 (French, 2003)
2
73.5% of U.S. CFOs (Graham & Harvey (2001)) and 45% in Europe use CAPM (Brounen, Abe de Jong and Koedijk
(2004)).
3
In fact Sharpe ultimately won noble prize in 1990 for his work on CAPM.
190
Electronic copy available at: http://ssrn.com/abstract=1866129
European Journal of Social Sciences – Volume 21, Number 2 (2011)

from early seventies reinforce CAPM as almost all the evidences are in favor4. Beaver, Ketler and
Scholes (1970) investigate relationship between systematic risk and accounting-based risk measures
and concludes a high degree of association between the two. Hamada (1972) detects positive
relationship between leverage and systematic risk. Galai and Masulis (1976) studies joint inference of
option theory and CAPM to security valuation concludes that leverage, debt value and variance of
return of a firm have an impact on systematic risk.
However, the most significant studies are of Black, Jensen and Scholes (BJS), Fama and
MacBeth (FMac) and Blume and Friend (BF) which are still applicable in contemporary financial
econometrics. BJS (1972) test CAPM from period 1926-1966 using NYSE market data examining
whether intercepts are zero on market beta for cross-sectional and time series regressions of excess
return. They find positive association between average return and market beta. BF (1973) and
FMac5(1973) also report similar results while Kim (1978) relies on truncated normal distributions to
develop an asset pricing model with costly bankruptcy and shows that impact of distress on bond prices
occurs via changes in the covariance between bond and market returns making CAPM seem almost
infallible.

Section II.III: CAPM-The Fallen Hero or Face Saving

However as research progressed, controversies rise as to prior evidence. There are three major
viewpoints developed towards CAPM apart from the one that accepts CAPM wholly and solely. The
first perspective completely rejects CAPM and makes it invalid both from theoretical as well from
empirical point of view. It is led by none other than Roll (1977) and Ross (1977), both arguing that
single-factor CAPM is rejected when the index returns are used as market return proxy. They argue
that proxy variable for market return is also supposed to be efficient and even a small deviations from
efficiency can produce relationship between risk and expected returns insignificant6. Secondly, they
argue as the true market portfolio is not observable so CAPM can not be tested. Ross (1976) applies
Arbitrage Pricing Theory (APT) to capital asset pricing and contests that APT substitutes CAPM, and
truly it is thought to be so until the first major blow came from Shanken (1982) who concludes that
APT does not entail a risk-return relation which is linear and exact even though the number of asset are
infinite. Also, Shanken (1987) and Kandel and Stambaugh (1987) both argue that, even though the
stock market is not true market portfolio, it must nevertheless a highly correlated proxy for the true
market. Later Reisman (1992) and Nawalkha (1997, 2004) report that APT is dying and taking its place
is multi-factor CAPM as the factors included in APT are already identified in multi-factor CAPM.
The second perspective does not reject CAPM altogether but it argues that anomalies are
present and beta is not the only predictor, as outlined by CAPM, rather size, value and momentum are
additional factors to be added to the model. Price-Earnings ratio7, Size-effect, Book-to-Market ratio
and various Time-effects are arguably various important factors need to be included in CAPM (FF
(1993, 1996)). Reasonable size of research concludes that smaller equity capitalization stocks on
average have higher risk-adjusted returns than larger firms in NYSE (Banz (1981), Reinganum (1981),
Dimson and Marsh (1984), Banz (1985), Ma and Shaw (1990)). Book-to-market (B/M) effect is an

4
For a thorough survey, please see Abbas(2011).
5
FMac (1973) provides evidence that of a larger intercept term than the risk-free rate, linear relationship between the
average return and the beta holds but when data covers a long time period.
6
Generally, market Indices have been taken as proxy for market returns which are not efficient portfolio.
7
Basu (1977) and later Reinganum (1981) for NYSE argue that securities with low P/E ratio tend to earn higher risk-
adjusted rate of returns than suggested by their beta and vice versa indicating relationship between investment
performance and its P/E ratio. Ball (1978) P/E is expected to explain portion of expected return for risk factors omitted.
Aggarwal, Hiraki and Rao (1988) study Tokyo Stock Exchange (TSE) for 574 listed firms and conclude P/E effect. Levis
(1989) concludes that the presence of P/E effect on London Stock Exchange (LSE). Ma and Shaw (1990) also report P/E
effect for Taiwan Stock Exchange though a weak one. However Gillan (1990), for New Zealand Stock, does not find P/E
evidence. Kim, Chung and Pyun (1992) report similar result for Korea Stock Exchange.
191
 European Journal of Social Sciences – Volume 21, Number 2 (2011)

important indicator for expected returns. Stattman (1980), Rosenberg, Reid and Lamstein (1985),
Debondt and Thaler (1987) and Fama and French (1992, 1996, 2004), all report that there is significant
but negative relation between B/M and expected returns. Moreover, Book-to-Market effect is vital in
financial distress, so risk premium should be compensated including it. It is also important to note that
contradictory results have also been reported8 [Xu, 2001].
Era of seventies and eighties saw series of discussion regarding presence of various market
anomalies as some of them have been discussed before (Basu (1977, 1983); Banz (1981); and Fama
and French (1980)). Rozeff and Kinney (1976)) reports January-effect implying abnormality whereas
weekend-effect is exposed by French (1980). Later on Heaton, Rouwenhorst and Wessels (1999)
examine the ability of beta to predict expected returns for 12 European countries. They conclude that
though beta and expected return are related but January effect is prevalent in January months.
Moreover, Nimal (2006) studies Tokyo Stock Exchange and concludes that CAPM is invalid as the
beta-return relationship does not hold.
Stattman (1980) and Rosenberg, Reid, and Lamstein (1985) present book-to-market anomaly.
Castanias9 (1983) reports that firms in high risk businesses tend to carry a lighter debt load while
Bhandari (1988) reports leverage effects. Handa, Kothari, and Wasely (1989) show that beta is
sensitive to length of return intervals. They find that the size-effect disappears if that interval is
changed from monthly to annual10. Chan and Chen (1991) observe size proxies for distress in size-
effect indicating that bankruptcy is a factor in the economics of systematic risk. Shleifer and Vishny
(1992) offer argument of liquidity of assets, a reason for smaller firms being highly leveraged.
Bhardwaj and Brooks (1992) demonstrate that low stock prices, rather than small market values, move
returns in January.
Research regarding second perspective has also been conducted in Asian Economies. It will be
unfair not to discuss the results attained in this part of the world. In Asian markets, Wong and Tan
(1991) observe linear relation in beta between systemic risk and average return to test the validity of
CAPM in Singapore Stock Exchange. Cheung and Wong (1992) study, for Hong Kong Equity Market,
relationships between returns and risk measures and contest that overall the application of CAPM in
equity market seems weak. Additionally, Huang (1997) also reports an inverse relationship between
returns and different measures of risk in Taiwan stock market. Ahmad and Zaman (2000) study the
same relationship for Karachi Stock Exchange using sector-wise monthly data from July 1992 to
March 1997 and conclude that risk is compensated by market. Iqbal and Brooks (2007) investigate, for
Pakistan over the period 1999 to 2005, role of thin trading and censoring correction in beta-estimation
in asset pricing testing; and find that while thin trading correction worked as expected but it does not
impact the results of asset pricing tests. The results in developed market are more against CAPM but
the overwhelming support in German Stock Exchange can not be denied11. While for emerging
markets the evidence for CAPM is mixed and one can not give a final verdict.
The third perspective does not address the above issue but it tries to overcome the theoretical
weaknesses of CAPM. This leads CAPM to a new world of modified-CAPM, where there are
numerous modified versions with numerable applications. Among them is the problem of y-intercept or
CAPM without risk-free borrowing or lending. Fischer Black (1972) develops Zero-Beta CAPM by
allowing unlimited short sales of risky assets making the composition of market portfolios from
efficient portfolios themselves, thus market portfolio becomes also efficient. Gibbons (1982) rejects
CAPM as well as Zero-Beta CAPM. However contrary to Gibbons, Stambaugh (1982) arrives at an
opposite conclusion and strongly supports Zero-Beta CAPM.
8
However Gillan (1990), for New Zealand Stock, does not find P/E evidence. Chou and Johnson (1990) find any evidence
for size effect for Taiwan Stock Exchange. Kim, Chung and Pyun (1992) report similar result for Korea Stock Exchange.
9
Kale, Noe, and Ramirez (199) contest, in contrast, theoretical justification for high debt being associated with high
business risk.
10
This result is challenged by Jegadeesh (1992) who gives argument that regressions that include both of these variables are
suspect because of the almost perfect inverse correlation between size and beta.
11
Sauer and Murphy (1992) assert that CAPM is best fit for German Stock Exchange.
192
European Journal of Social Sciences – Volume 21, Number 2 (2011)

Another argument placed is that beta is not stable and is sensitive to economic factor thus
leading time-varying beta12 CAPM or Conditional CAPM (CCAPM) which not only captures time-
varying beta on an information set but also explains anomalies. Bollerslev (1987) and French, Schwert,
and Stambaugh (1987) allow both conditional expected returns and variances to be time varying.
Harvey (1995) studies 20 emerging equity markets and concludes that half of the predictable variance
in the emerging market returns can be traced to local information. Pettengill, Sundaram and Mathur
(1995) and Fletcher (2000) examine the conditional beta-return relationship and assert that not
considering macro-economic variables in CAPM lead to its failure. Jagannathan and Wang (1996),
Lettau and Ludvigson (2001), Zhang (2003) and Petkova and Zhang (2003) argue that stock market
anomalies are effectively dealt by CCAPM. On the contrary, Lewellen and Nagel (2003) find out that
anomalies like B/M and momentum can not be explained by CCAPM and most importantly,
conditional alphas are large and significant which is indirect violation of CCAPM.
CAPM assumes normal distribution but returns are found to have skewness and kurtosis.
Common methodology is to include higher moments in CAPM. Higher moments’ inception is believed
to be solution to empirical problems of CAPM with Kraus and Litzenberger (1976), Ingersoll (1975),
Fang and Lai (1997), Hwang and Satchell (1999), Harvey and Siddique (2000), Christie-David and
Chaudry (2001) and Jurcenzko and Maillet (2002) favoring the change with strong empirical evidence
behind them. However the problem of non-normality can be addressed by using Generalized Method
of Moments (GMM) as normal distribution assumption is a sufficient not a necessary condition to
derive CAPM. The assumption regarding normality of returns is assumed for statistical purposes and to
make it empirically testable (Campbell, Lo and MacKinlay (1997), chapter 5). Satchell (2001) derives
a utility function that is consistent with LPM-CAPM without making any distributional assumptions
showing that Tobin’s two-fund separation exists.
But a meticulous analysis yields that the there is something missing that has its root in the
theoretical framework of CAPM and is encountered many a times in the empirical arena in the name of
“normality”. And perhaps the answer lies in how investor defines, recognizes and assigns a value to
risk. CAPM is based on Markowitz’s (1952) Mean-Variance (MV) framework implying that investor
care about return and variance. But the irony is that the person who purposes MV-framework initially,
he himself is convinced that semivariance instead of variance is better measure of risk, but discards it
due to lack of resources at that time13. Markowitz (1959) stays with the variance measure in spite of
recognizing the importance of semivariance. So history is to be rediscovered and perhaps the problems
of CAPM lie in retracing the footsteps back in time to the very beginning of the model.

Section III.I: Safety First-Start of a New Era

It is said that it is never too late for heroes and so it can be said for downside risk. Initially discarded
(Markowitz (1952, 1959), sustaining for three decades, overlooked, but slowly makes its way to the
coliseum arena. It starts with Roy (1952) who argues that investor care for disaster and first and the
foremost goal is the safety from that disaster, or in other words the safety-first rule (SF-rule). If this is
true then Markowitz MV-framework to portfolio management does not apply and as CAPM is heavily
dependent on MV-framework so CAPM does not hold or becomes invalid. Combining Markowitz’s
portfolio theory (1952) with Roy’s SF-rule (1952) without contravening the assumption of Tobin
(1958) 2-Fund Separation Theorem yields comparatively amazing results, but history has to wait to be
rewritten.

12
Since the introduction of ARCH/GARCH-type processes by Engle (1982) time-varying beta has been given considerable
attention in the literature (Bollerslev, Engle and Wooldridge (1988)).
13
Variance is computationally simpler as semivariance optimization model requires twice the number of data inputs than
the variance model and with the lack of cost-effective computer power until advent of the microcomputer in 1980s and
with the fact that variance model is already mathematically very complex.
193
 European Journal of Social Sciences – Volume 21, Number 2 (2011)

During sixties and seventies, downside risk remains alive despite of CAPM overtaking the
world of asset pricing. Quirk and Saposnik (1962), Mao (1970), Klemkosky (1973) and Ang and Chua
(1979) demonstrate superiority of the semivariance over variance. Though Hogan and Warren (1974)
replace variance with semivariance for portfolio risk in CAPM to give the first official version of
downside beta CAPM or DCAPM based on downside risk but it fails to get due attention until the
breakthrough by Bawa in 1975.
Stochastic dominance (SD), a powerful risk analysis tool, is used to measure semivariance
which does not rely on certain type of distribution (e.g. normal distribution) rather uses cumulative
distribution14, can not be quantified. However in 1975 Bawa developed Lower Partial Moment (LPM),
a proxy for SD. Fishburn (1977) extends the general LPM model into unlimited view of LPM which
embraces all classes of investors; risk averse, risk seeking and risk neutral. Balzer (2001) derives
mathematically the relationship between utility and downside risk measures, and contest that the
expected approximation can accommodate different types of behavior for different investors. This
makes semivariance framework based on SF-rule superior than Markowitz’s M-V framework15.
Keeping in view the Safety-First rule in consideration, CAPM has been extended into
Downside CAPM (Hogan and Warren (1974), Bawa and Lindenberg (1977), Harlow and Rao (1989)
and Estrada (2002)). Bawa and Lindenberg (1977) suggested inclusion of downside beta (risk) instead
of regular beta in the following way:
E [( R i − R f ) m in( R m − R f , 0)]
β imB L =
E [(m in( R m − R f , 0)] 2
The numerator in Equation is referred to as the co-semivariance of returns and is the covariance
of returns below Rf on the market portfolio with returns in excess of Rf on security i.
It is also argued that risk is often seen as downside deviations below a target level by market
participants and risk-free rate is replaced for average equity market returns (Harlow and Rao (1989)).
The down side beta for Harlow and Rao (1989) can be shown as:
E [( Ri − µ i ) min( R m − µ m , 0)]
β imHR =
E [(min( R m − µ m , 0)]2
Where µ i and µ m are security i and market average returns respectively.
Estrada (2002) modified the down side beta in a downside framework as follows:
E[min( Ri − µi , 0) min( Rm − µ m , 0)]
β imE =
E[(min( Rm − µ m , 0)]2
Disagreement between CAPM and DCAPM does not mean to nullify CAPM but to show that
DCAPM is both theoretically as well empirically superior; as the strongest rationale behind it, that
investors are safety conscious. Invalidating CAPM means shooting you as for different distributions,
CAPM is a special case of DCAPM16 (Nawrocki (1999)). Secondly, it can not be argued that Zero-beta
CAPM, CCAPM or Higher-order CAPM is a better risk measure than DCAPM as adding zero-beta
portfolio, conditionality or skewness/kurtosis can also be done to DCAPM with the same convenience.
And lastly, skewness is not to be confused with downside risk. Though DCAPM works well when
distribution is non-normal or skewness is present but it is primarily confined to the second moment
only17. These three points will be discussed in detail in the next section.

14
There are three main types of SD namely; First-order SD, Second-order SD and Third-order SD (Elton, Gruber, Brown
and Goetzmann (2003)).
15
MV based CAPM primarily assumes risk averse investor.
16
When distribution is normal, CAPM and DCAPM yield the same result when variance and semivariance is taken into
account (Nawrocki (1999) and Estrada (2002)).
17
Second-order downside utility has quadratic penalty on downside returns while third-order downside utility is a cubic
penalty. For details see Sortino and Satchell (2001), chapter 8.
194
European Journal of Social Sciences – Volume 21, Number 2 (2011)

Section III.II: Empirical Results of DCAPM-Down-to-Earth Pays

CAPM’s empirical evidence is based on normality, however evidence is overwhelmingly against it.
Fama (1965), Kon (1984), Affleck-Graves and McDonald (1989), Richardson and Smith (1993),
Susmel (2001), Hwang and Pedersen (2002), Dufour, Khalaf and Beaulieu (2003), all provide evidence
against the assumption of normality. Jagannathan and McGrattan (1995) challenge the quadratic utility
used in CAPM. Aparicio and Estrada (1997) study stock returns in the Scandinavian markets and
conclude that the distributions of daily stock returns show fat tails and high peaks. Bekaert and Harvey
(1995, 1997), Eftekhari and Satchell (1996) and Bekaert, Erb, Harvey, and Viskanta (1998), show that
emerging market equities display non-normality in emerging markets. With all the empirical evidence
against normality, to test CAPM, a model, is to arrive at advance statistical tools accommodating
skewness or kurtosis or come up with a model which is flexible enough to accommodate them.
Additionally, investors dislike downside risk and do not give equal weights to both upside and
downside risk as assumed in CAPM. Markowitz (1959) agrees that investors care more for downside
risk rather than the market risk. Kahneman and Tversky (1979) and Gul (1991) conclude that investors
emphasize or in other words give more weights to losses as compared to gains implying the importance
of downside risk. Estrada (2000, 2002 and 2007) studies investors in emerging markets and accentuate
that investors care more downside risk. Estrada (2002) shows that mean returns in developed as well as
emerging markets are more sensitive to changes in downside beta than to equal changes in beta. And
still more Post and Levy (2005) emphasize that if investors show different behavior for bear and bull
markets18, then they are willing to pay premium for stocks giving downside protection in bear markets
and upside potential in bull markets. With irresistible evidence from both developed and emerging
markets for non-normality and investor’s preference for downside risk, DCAPM seems to be the
ultimate alternate to CAPM, both for theoretical and empirical grounds.
Levy and Markowitz (1979) defend portfolios based on MV-framework which yields level of
utility approximately equal to expected utility of an investor. Estrada (2002) asserts that mean-
semivariance (MSV) framework can also be defended with the same criterion used by Levy and
Markowitz. Secondly he concludes that empirically semi variance is more credible than standard
deviation. Grootveld and Hallerbach (1999) study US asset allocation portfolios, based on variance and
semivariance, and conclude that downside risk approaches tend to favor. Estrada (2000) argues that for
partially-integrated emerging markets, cost of equity calculated using downside risk is more
appropriate. Harvey (2000) suggests the supremacy of downside risk for emerging markets for a
sample based on equilibrium as well as non-equilibrium-based risk measures. Ang, Chen and Xing
(2002) study downside risk on NYSE and conclude that past downside beta is good predictor of future
covariation with downside market movements. Estrada (2002) study both developed market as well as
emerging markets for various risk measures. He affirms that DCAPM explains over 45% of variability
in cross-section of returns of a joint sample of developed markets as well as emerging markets and
55% of variability in cross section of returns in emerging markets. Post and Vliet (2004) on comparing
CAPM and DCAPM, conclude that DCAPM outperforms CAPM. Estrada and Serra (2005) find out
that among the various risk measures, global downside beta has the largest impact on portfolio. The
evidence stated above is just tip of the iceberg, but the question arises as whether DCAPM is flexible
enough to accommodate unstable downside beta and higher moments in the downside risk model as
evidence of both is sufficient and irresistible, not to be overlooked.
As the problem of instable beta, Ang, Chen, and Xing (2002) split up bets into downside and
upside betas which are conditional on falling and rising markets. They observe that conditional betas
split up this way exhibit little asymmetry relative to conditional correlations. So they turn their
attention to downside correlation for a measure of asymmetric risk. In another study having a sample
from 1926 to 2002 for US stocks, Post and Vliet (2004) test CAPM and CCAPM against mean
semivariance(MS)-CAPM and conditional MS-CAPM and sum up that the latter perform better both

18
Investors are risk averse for losses and they are risk seeking for gains.
195
 European Journal of Social Sciences – Volume 21, Number 2 (2011)

theoretically and empirically and is a possible alternative for regular beta. Galagedera and Jaapar
(2009) uses time-varying systematic downside risk for daily returns of Malaysian stock exchange and
find out that conditional covariance between excess portfolio return and market portfolio downside
excess return is persistent and covariance between industry portfolio excess return and market portfolio
downside excess returns vary over time. Bali, Demirtas and Levy (2009) examine intertemporal
relation between downside risks and expected stock returns. They contest that if downside risk
determines expected returns, then its proxies will perform well also. So they use Value-at-Risk (VaR)
as a proxy for downside risk and the results indicate that VaR outperforms both variance as well
conditional variance proxies.
Stock prices exhibit non-normality19so the importance of skewness, at least, can not be
overlooked. Adcock and Shutes (1998), Leland (1999), Harvey and Siddique (2000), Chen, Hong and
Stein (2001) and Adcock and Shutes (2002) all observe, conclude and stress that for asset pricing,
skewness is an important measure that can not be overlooked. Christie-David and Chaudhry (2001)
demonstrate that third and fourth moments explain better the returns in futures markets. Adcock
(2002), not only introduces skewness to describe properties of a non-linear market model but he also
adds leptokurtic distributions. But all skewness is not bad. Rubinstein (1973), Kraus and Litzenberger
(1976), Friend and Westerfield (1980) and Harvey and Siddique (2000) demonstrate that investors
dislike negative co-skewness meaning that stocks with low co-skewness amplify high average stock
returns. Downside risk is not to be mixed up with co-skewness risk. The downside market movements
are captured by downside beta in non-linear manner, while co-skewness does not emphasize
asymmetries for down and up markets even though co-skewness may vary over time. However co-
skewness captures some aspects of downside covariation, so co-skewness is to be controlled in
assessing premium for downside beta. Kaplanski (2004) develops downside risk asset-pricing model,
based on Conditional-VaR20. The study point out that CVaR-beta based on downside risk, has
explanatory power greater than traditional beta especially for bearish market. Galagedera and Brooks
(2005) include downside co-skewness to downside beta to asses and compare the performance of
downside risk with and without co-skewness. They conclude that co-skewness is crucial for developing
downside framework opening the door for higher moments not only in CAPM but also in DCAPM.

Section IV: Conclusion-The Aftermath

CAPM has come a long way. Although it has captured the minds in the field of financial econometrics,
with applause in the beginning, but later on the researchers started looking at it skeptically because of
anomalies, inefficient market portfolio and the condition of normality; and started finding an
alternative for it.
Downside risk in recent times has caught the eye of researcher. CAPM based on downside risk,
DCAPM is being thought to be a fast replacement of CAPM. It captures almost all the features of
CAPM but let goes the condition of normality and investor’s preference for both upside and downside
risk. With evidence pouring in from all corners of the world, especially from emerging markets that
DCAPM and its modified versions outperforms CAPM and its sister modifications, DCAPM can
provide the solution to asset pricing problem.
But DCAPM is still a model and does have room for improvement. Though improved through
Conditional-DCAPM but it is not the end of the road. Intertemporal DCAPM and Consumption-based
DCAPM and not to forget International DCAPM arising fast due to globalization, is just an eye opener
and behind it lay the calm sea waiting to be disturbed. Investors desperately need a model with which
they can forecast returns, diversify their risk and increase their earnings. They need a solution, a

19
For details see Fama (1965), Kon (1984), Affleck-Graves and McDonald (1989), Richardson and Smith (1993), Bekaert
and Harvey (1995, 1997), Eftekhari and Satchell (1996), Aparicio and Estrada (1997), Bekaert, Erb, Harvey, and
Viskanta (1998), Susmel (2001), Hwang and Pedersen (2002) and Dufour, Khalaf and Beaulieu (2003).
20
CVaR risk measure help to incorporated extreme results, skewness and the fat-tails phenomena as well.
196
European Journal of Social Sciences – Volume 21, Number 2 (2011)

permanent solution, and perhaps they can find one in DCAPM, if not wholly, but to start with, at least
for the time being.

References
[1] Abbas Q, Ayub U, Kashif S, (2011), “CAPM-Exclusive Problems Exclusively Dealt”,
Interdisciplinary Journal of Contemporary Research In Business, ISSN 2073-7122,
Forthcoming April 2011.
[2] Adcock C. (2002), “Capital Asset pricing based on Multivariate skew student distribution”,
Working Paper.
[3] Adcock C. and K. Shutes, (1998), “Portfolio Selection Based on the Multivariate Skew Normal
Distribution”, Working Paper University of Bath, January 1999.
[4] Adcock C. and K. Shutes, (2002), “Fat Tails and The Capital Asset Pricing Model”, Working
Paper University of Bath, February 1999, 28 pages.
[5] Affleck-Graves, J. F., and McDonald, B, (1989), "Non-normalities and Tests of Asset Pricing
Theories," Journal of Finance, 44 (September, 1989)
[6] Aggarwal, R., T. Hiraki and R. Rao (1988) 'Earning/Price Ratios, Size, and Seasonal Anomalies
in the Japanese Securities Market, Working paper, John Carroll Univeristy.
[7] Ahmad Eatzaz and Badar-u-Zaman (1999), “Volatility and Stock Return at Karachi Stock
Exchange”. Pakistan Economic and Social Review 37:1, 25–37.
[8] Ahmad Eatzaz and Badar-u-Zaman (2000), “Risk, Uncertainty and Stock Return at Karachi
Stock Exchange”. Lahore Journal of Economics.
[9] Ang, James S. and Jess H. Chua. (1979),"Composite Measures For The Evaluation of
Investment Performance," Journal of Financial and Quantitative Analysis, 361-384.
[10] Ang, Andrew, Joseph Chen, and Yuhang Xing (2006), “Downside Risk,” Review of Financial
Studies, 19(4), 1191-1239.
[11] Ang, A., J. Chen and Y. Xing, (2002), “Downside Correlation and Expected Stock Returns,”
NBER working paper 8643.
[12] Aparicio, Felipe Miguel and Estrada, Javier, Empirical Distributions of Stock Returns:
European Securities Markets, 1990-95 (April 1997).
[13] Bali, TG; Demirtas, KO; Levy, H, (2008), "Nonlinear mean reversion in stock prices",
JOURNAL OF BANKING & FINANCE, Vol. 32, Issue. 5 , 767-782
[14] Ball, R. (1978), “Anomalies in relations between securities’ yields and yield surrogates”,
Journal of Financial Economics 6:103−126.
[15] Banz, Rolf (1981) “The Relationship between Returns and Market Value of Common Stocks”,
Journal of Financial Economics 9: 3–18. June.
[16] Basu, Sanjoy (1977), “Investment Performance of Common Stocks in Relation to their Price
Earnings Ratios: A Test of the Efficient Market Hypothesis,” Journal of Finance, vol. 32, 663-
682.
[17] Basu, Sanjoy(1983), “The Relationship between Earnings Yield, Market Value, and Return for
NYSE Common Stocks,” Journal of Financial Economics, vol. 12, 126-441.
[18] Bawa, Vijay, and Eric Lindenberg, (1977), “Capital Market Equilibrium in a Mean- Lower
Partial Moment Framework”, Journal of Financial Economics 5, 189–200.
[19] Bawa, Vijay S. (1975), "Optimal Rules For Ordering Uncertain Prospects," Journal of Financial
Economics, 2(1), 95-121.
[20] Beaver, W., R. Kettler and M. Scholes, (1970), "The Association between Market Determined
and Accounting Determined Risk Measures," Accounting Review, 45, 654-82.
[21] Bekaert G, C. R. Harvey, "Emerging Equity Market Volatility," Journal of Financial
Economics, 43 (1997), pp. 29-78.

197
 European Journal of Social Sciences – Volume 21, Number 2 (2011)

[22] Bekaert,. C. R. Harvey, "Time-Varying World Integration," Journal of Finance, 50 (1995), pp.
403-44.
[23] Erb, C. B., Harvey, and T. E. Viskanta, (1998),.” Market Returns and Asset Allocation,"
Journal of Portfolio Management, 24 (1998),
[24] Bhandari, Laxmi Chand. (1988).”Debt/Equity Ratio and Expected Common Stock Returns:
Empirical Evidence.”Journal of Finance. 43:2, pp. 507-28.
[25] Bhardwaj, R.K., Brooks, L.D. (1993), "Dual betas from bull and bear markets: reversal of the
size-effect", The Journal of Financial Research, Vol. 16 pp.269-83.
[26] Blume, M. and Friend, I., (1973), “A New Look at the Capital Asset Pricing Model,” Journal of
Finance, 19-33.
[27] Black, F. (1993), "Beta and return", Journal of Portfolio Management, Vol. 20 pp.8-18.
[28] Black, F., Jensen, M., Scholes, M. (1972), "The capital asset pricing model: some empirical
tests", in Jensen, M.C. (Eds),Studies in the Theory of Capital Markets, Praeger, New York, NY,
pp.79-124.
[29] Bollerslev, T. (1986), "Generalized autoregressive conditional heteroscedasticity", Journal of
Economics, Vol. 31 pp.307-27.
[30] Bollerslev, T., Engle, R.F., Nelson, D. (1994), "ARCH models", in Engle, R.F., McFadden,
D.L. (Eds),Handbook of Econometrics, North Holland, Amsterdam, Vol. IV pp.2959-3038.
[31] Bollerslev, T., Engle, R.F., Wooldridge, J.M. (1988), "A capital asset pricing model with time
varying covariances", Journal of Political Economy, Vol. 96 pp.116-31.
[32] Brounen, D., De Jong, A., Koedijk, C.G., (2004). Corporate Finance in Europe: Confronting
Theory with Practice, Financial Management 33, 71-101.
[33] Brooks, R., Faff, R., Lee, J. (1994), "Beta stability and portfolio formation", Pacific-Basin
Finance Journal, Vol. 2 pp.463-79.
[34] Campbell, J. Y., A. W. Lo, and A. MacKinlay (1997): The Econometrics of Financial Markets.
Princeton University Press, Princeton.
[35] Castanias, R. (1983), “Bankruptcy risk and optimal capital structure” The Journal of Finance,
38, pp. 1617-1635.
[36] Chan, KC and Chen, N. (1991), “An Unconditional Asset-Pricing Test and the Role of Firm
Size as an Instrumental Variable for Risk”, XLIII, NO. 2 * JUNE 1988
[37] Chan, L.K.C., Lakonishok, J. (1993), "Are the reports of beta's death premature?", Journal of
Portfolio Management, Vol. 19 pp.51-62.
[38] Chan, L.K.C., Hamao, Y., Lakonishok, J. (1991), "Fundamentals and stock returns in Japan",
Journal of Finance, Vol. 46 pp.1739-64.
[39] Chen, J., H. Hong and J. Stein (2001), “Forecasting crashes: trading volume, past returns and
conditional skewness in stock prices”, Journal of Financial Economics 61:345−381.
[40] Cheung, Y. L., Wong, K. T., (1992), "An Assessment of Risk and Return: Some Emprical
Findings from Hong Kong stock Exchange”, Applied Financial Economics, Vol. 3 pp.315-324.
[41] Christie-David, R., Chaudhry, M. (2001), "Coskewness and cokurtosis in futures markets",
Journal of Empirical Finance, Vol. 8 pp.55-81.
[42] Chou, S. R, Johnson, K. (1990), “An Emprical Anlysis of Stock Market Anomalies: Evidence
from the Republic of China in Taiwan,” in S.G. Rhee and R..P. Chang (Editors), Pacific –Basin
Capital Markets Research, Volume 1 (North Holland)
[43] De Bondt, Werner F M & Thaler, Richard H, (1987). " Further Evidence on Investor
Overreaction and Stock Market Seasonalit y," Journal of Finance.
[44] DeGiorgi, E., T. Hens, and H. Levy (2004): “Existence of CAPM Equilibria with Prospect
Theory Preferences," NCCR-Finrisk Working Paper No. 85, University of Zurich.
[45] Dimson, E. Marsh, P (1984), "Hedging the Market, the performance of FTSE 100 share index”,
journal of Institute of Actuaries (111:2) pp 403-430.

198
European Journal of Social Sciences – Volume 21, Number 2 (2011)

[46] Dufour, J.-M., L. Khalaf, M.-C. Beaulieu (2003): “Exact Skewness-Kurtosis Tests for
Multivariate Normality and Goodness-of-Fit in Multivariate Regressions with Application to
Asset Pricing Models,” Oxford Bulletin of Economics and Statistics, 65, 891–906.
[47] Engle, R.F. (1982), "Autoregressive conditional heteroscedasticity with estimates of the
variance of U.K. inflation", Econometrica, Vol. 50 pp.122-50.
[48] Estrada, J. (2001, Spring). The Cost of Equity in Emerging Markets: A Downside Risk
Approach (II). Emerging Markets Quarterly, 63–72.
[49] Estrada, J. (2002). Systematic Risk in Emerging Markets: The D-CAPM. Emerging Markets
Review, 4, 365–379.
[50] Estrada, J. & Serra, A. P. (2005) Risk and Return in Emerging Markets: Family Matters.
Journal of Multinational Financial Management, 15 (3), 257-272.
[51] Fama, Eugene F. (1965), "The Behavior of Stock Market Prices," Journal of Business, 38, 34-
105.
[52] Fama, Eugene (1965), “Random Walks in Stock Market Prices,” Financial Analysts Journal,
vol. 21, no. 5 (September/October), 55-59.
[53] Fama, Eugene, Lawrence Fisher, Michael Jensen, and Richard Roll (1969), “The Adjustment of
Stock Prices to New Information,” International Economic Review, vol. 10, 1-21.
[54] Fama. Eugene F. and James MacBeth. (1973). Risk. Return and Equilibrium: Empirical Tests,
Journal of Political Economy 81. 607-636.
[55] Fama, Eugene F. and Kenneth R. French. (2004). “The Capital Asset Pricing Model: Theory
and Evidence.” Journal of Economic Perspectives 18(3):25-46.
[56] Fama, E.F., French, K.R. (1993), "The cross-section of expected stock returns", Journal of
Finance, Vol. 47 pp.427-65.
[57] Fama, E.F., French, K.R. (1996), "Size and book-to-market factors in earnings and returns",
Journal of Finance, Vol. 50 pp.131-56.
[58] Fama, E.F., MacBeth, J.D. (1973), "Risk, return and equilibrium: empirical tests", The Journal
of Political Economy, Vol. 81 pp.607-36.
[59] Fang, H., Lai, T.-Y. (1997), "Co-kurtosis and capital asset pricing", The Financial Review, Vol.
32 pp.293-307.
[60] Fishburn, Peter C. (1977) "Mean-Risk Analysis with Risk Associated with Below-Target
Returns," American Economic Review, V 67(2), 116-126.
[61] Friend, I. and Westerfield, R. (1980), "Coskewness and capital asset pricing". Journal of
Finance 35(4)
[62] French, K. (1980), "Stock Returns and the Weekend Effect," Journal of Financial Economics 8,
55-69.
[63] Fletcher, J (2000), “On the Conditional Relationship between Beta and Return in International
Stock Return”, International Review of Financial Analyst, Vol 9, pp 235-245.
[64] French, K. R., G. W. Schwert and R. E. Stambaugh (1987), ‘Expected Stock Returns and
Volatility’, Journal of Financial Economics, 19, 3-29.
[65] Galai, D. & Masulis, R. (1976). The Option Pricing Model and the Risk Factor of Stock,
Journal of Financial Economics, Vol. 3, No. 1-2
[66] Galagedera, D.U.A. and Brooks, R. (2005). Is Systematic Downside Beta Risk Really Priced?
Evidence in Emerging Market Data,
[67] Galagedera, Don U A & Jaapar, A. M. (2009). "Modeling Time-Varying Downside Risk," The
Journal of Financial Economics
[68] Gibbons, Michael R., and Patrick Hess (1981), “Day of the Week Effects and Asset Returns”,
Journal of Business 54, 579-596.
[69] Graham, John and Campbell Harvey,(2001) “The Theory and Practice of Corporate Finance:
Evidence from the Field”, Journal of Financial Economics, LX, 187-243.

199
 European Journal of Social Sciences – Volume 21, Number 2 (2011)

[70] Grootveld, H., & Hallerbach, W. (1999). Variance vs downside risk: Is there really that much
difference? European Journal of Operational Research, 114, 304–319.
[71] Gul, F. (1991). “A theory of disappointment aversion”. Econometrica, 59, 667-686.
[72] Hamada, R.S. (1972) “The Effect of the Firm's Capital Structure on the Systematic Risk of
Common Stocks,” The Journal of Finance, 27(2):435-452
[73] Hamao, Y., R. W. Masulis and V. Ng (1990), ‘Correlations in price changes and volatility
across international stock markets’, 3, Review of Financial Studies, 281-307.
[74] Handa, P., Kothari, S., and Wasley, C., (1989), The Relation Between the Return Interval and
Betas: Implications for the Size-Effect, Journal of Financial Economics, 23, 79-100..
[75] Harlow, W. V. and Ramesh K. S. Rao.(1989) "Asset Pricing in a Generalized Mean-Lower
Partial Moment Framework: Theory And Evidence," Journal of Financial and Quantitative
Analysis, , v24(3), 285-312
[76] Harvey, Campbell R., 1993b, Conditional asset allocation in emerging markets, Working paper,
Duke University, Durham, NC.
[77] Harvey, Campbell R., 1995a, Predictable risk and returns in emerging markets, Review of
Financial Studies 8, 773--816.
[78] Harvey, Campbell R., 1995b, The risk exposure of emerging markets, World Bank Economic
Review, 9, 19--50.
[79] Harvey, Campbell R., 1995c, The cross-section of volatility and autocorrelation in emerging
equity markets, Finanzmarkt und Portfolio Management 9, 12--34.
[80] Harvey, C., Siddique, A. (2000), "Conditional skewness in asset pricing tests", Journal of
Finance, Vol. 55 pp.1263-95.
[81] Hogan, William W. and James M. Warren.(1974) "Toward The Development Of An
Equilibrium Capital-Market Model Based On Semivariance," Journal of Financial and
Quantitative Analysis, v9(1), 1-11.
[82] Huang, C. F., and D. Litzenberger. (1988). “Foundations for Financial Economics”.
Amsterdam: North-Holland.
[83] Hwang S. and S. Satchell (1998), “Modelling Emerging Market Risk Premia using Higher
Moments”, DAE Working Paper 9806, University of Cambridge, 36 pages.
[84] Lettau, Martin & Ludvigson, Sydney, (2001). "Measuring and Modelling Variation in the Risk-
Return Trade-off," CEPR Discussion Papers 3105, C.E.P.R. Discussion Papers.
[85] Lewellen J & Nagel S, (2003). "The Conditional CAPM does not Explain Asset-Pricing
Anamolies," NBER Working Papers 9974, National Bureau of Economics.
[86] Huang, H.R. (2000), "Tests of regimes-switching CAPM", Applied Financial Economics, Vol.
10 pp.573-8.
[87] Ingersoll (1975), “Multidimensional Security Pricing”. Journal of Financial and Quantitative
Analysis, 10, pp 785-798
[88] Iqbal, Javed & Brooks, Robert & Galagedera, Don UA, (2007). "Testing Asset Pricing Models
in Emerging Markets: An Examination of Higher Order Co-Moments and Alternative Factor
Models," MPRA Paper 25020, University Library of Munich, Germany.
[89] Jagannathan, R McGrattan, Ellen R. (1995). “The CAPM Debate” Federal Reserve Bank of
Minneapolis Quarterly Review, Vol. 19, No. 4, Fall 1995, pp. 2-17.
[90] Jagannathan, R., Wang, Z. (1996), "The conditional CAPM and the cross-section of expected
returns", Journal of Finance, Vol. 51 pp.3-53.
[91] Jurcenzko E., and Maillet, B., (2002), “The Four-Moment Capital Asset Pricing Model: Some
Basic Results”, Edhec Publications working paper.
[92] Kale, Jayant R & Noe, Thomas H & Ramirez, Gabriel G, (1991). " The Effect of Business Risk
on Corporate Capital Structure: Theory and Evidence," Journal of Finance, American Finance
Association, vol. 46(5), pages 1693-715, December

200
European Journal of Social Sciences – Volume 21, Number 2 (2011)

[93] Kandel, S., Stambaugh, R.F. (1995), "Portfolio inefficiency and the cross-section of expected
returns", Journal of Finance, Vol. 50 pp.157-84.
[94] Kaplanski, G., (2004), "Traditional Beta, Downside Risk Beta and Market Risk Premiums,"
Quarterly Review of Economics and Finance, 44(5).
[95] Kim, M.K., Zumwa, J.K. (1979), "An analysis of risk in bull and bear markets", Journal of
Financial and Quantitative Analysis, Vol. 14 pp.1015-25.
[96] Kim, Y. G., K. H. Chung, C. S. Pyun (1992): “Size, price-earnings ratio, and seasonal
anomalies in Korean stock Market, Pacific-basin Capital Markets Research, 3, 303–319.
[97] Klemkosky, Robert C. (1973) "The Bias In Composite Performance Measures," Journal of
Financial and Quantitative Analysis, , v8(3), 505-514.
[98] Kothari, S.P., Shanken, J., Sloan, R.G. (1995), "Another look at the cross-section of expected
stock returns", Journal of Finance, Vol. 50 pp.185-224.
[99] Kon S. T. 1984. “Models of Stock Returns-A Comparison”. The Journal of Finance, 39(1):147-
165.
[100] Kroll,Y. Levy, H. and Markowitz,H. M. (1984) “Mean-variance versus Direct Utility
Maximization,” J. Finance, 39, pp. 47–61.
[101] Kraus, A., Litzenberger, R.H. (1976), "Skewness preference and the valuation of risk assets",
Journal of Finance, Vol. 31 pp.1085-100.
[102] Lettau M & Ludvigson S, (2001). "Resurrecting the (C)CAPM: A Cross-Sectional Test When
Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press,
vol. 109(6), pages 1238-1287, December
[103] Leland,. H E., (1999), “Beyond Mean-Variance: Performance Measurement in a
Nonsymmetrical World”, Financial Analysts Journal, Vol. 55, Issue 1, p. 27-36;
[104] Levy, R.A. (1974), "Beta coefficients as predictors of returns", Financial Analysts Journal,
Vol. 30 pp.61-69.
[105] Levy, H. European Financial Management, 2010 - Wiley Online Library
[106] Levy, H., (2006) “Stochastic Dominance-Investment Decision Making under Uncertainty”,
NewYork: Springer.
[107] Levy, H. and Markowitz, H.M. (1979)"Approximating Expected Utility by a Function of Mean
and Variance," Amer. Econ. Rev., , 69(3), pp. 308-17.
[108] Levy, R.A. (1974), "Beta coefficients as predictors of returns", Financial Analysts Journal,
Vol. 30 pp.61-69.
[109] Lintner, J. (1965), "The valuation of risk assets and selection of risky investments in stock
portfolios and capital budgets", Review of Economics and Statistics, Vol. 47 pp.13-37.
[110] Markowitz, H. M. (1991). “Foundations of Portfolio Theory”, J. Finance 46(2) 469–477.
[111] Markowitz, H.M. (1959). “Portfolio Selection: Efficient Diversification of Investments”, New
York: John Wiley & Sons.
[112] Markowitz, H. M., (1952), “Portfolio Selection”, Journal of Finance, March, 77-91
[113] Mao, James C. T. (1970),"Models Of Capital Budgeting, E-V Vs. E-S," Journal of Financial
and Quantitative Analysis, v5(5), 657-676.
[114] Mossin, J., (1966), “Equilibrium in a Capital Asset Market”, Econometrica 34, 768
[115] Nawrocki, D. (1999). “A Brief History of Downside Risk Measures.” J. Investing 8(3) 9–26.
[116] Nawalkha, Sanjay K., (1997). "A multibeta representation theorem for linear asset pricing
theories," Journal of Financial Economics
[117] Nawalkha, Sanjay and Schwarz, C (2004), "The Progeny of CAPM," Journal of Investment
Management, third quarter,.
[118] Pedersen, C., and Hwang, S., (2007), “Does Downside Beta Matter in Asset Pricing?”, Applied
Financial Economics, ((17), pp.961-978.
[119] Petkova, Ralitsa & Zhang, Lu, (2005). "Is value riskier than growth?," Journal of Financial
Economics, Elsevier, vol. 78(1), pages 187-202, October

201
 European Journal of Social Sciences – Volume 21, Number 2 (2011)

[120] Pettengill, G.N., Sundaram, S., Mathur, L. (1995), "The conditional relation between beta and
returns", Journal of Financial and Quantitative Analysis, Vol. 30 pp.101-16.
[121] Post, T., and Levy, H.,(2005) "Does risk seeking drive stock prices?... investor preferences and
beliefs," Review of Financial Studies 18, 925-953
[122] Post, T. and Vilet, P. V. (2004) “Conditional Downside Risk and the CAPM”, Rotterdam, The
Netherlands, Erasmus Research Institute of Management (ERIM), Rotterdam School of
Management/ Rotterdam School of Economics, Erasmus Universities Rotterdam.
[123] Quirk, J.P. and R. Saposnik (1962) “Admissability and Measurable Utility Functions.” Review
of Economic Studies.
[124] Radcliffe, R.C. (1987), Investment, 2nd ed., Scott, Foresman and Company, London,.
[125] Reinganum, Marc R., (1983), “The Anomalous Stock Market Behavior of Small Firms in
January: Empirical tests for tax-loss selling effects”. Journal of Financial Economics 12, 89-
104.
[126] Reinganum, M. (1981), “A Misspecification of Capital Asset Pricing: Empirical Anomalies
Based on Earnings Yields and Market Values”. Journal of Financial Economics 9, 19-46.
[127] Reisman, H., (1992), "Reference variables, factor structure, and the multibeta representation,"
Journal of Finance, 47, 1303 - 1314.
[128] Rendelman, Richard J., Charles P. Jones, and Henry A. Latané (1982), “Empirical Anomalies
Based on Unexpected Earnings and the Importance of the Risk Adjustments,” Journal of
Financial Economics, vol. 10, no. 3, 269-287.
[129] Richardson, M and Smith, T.(1993) “A test for multivariate normality in stock returns”,
Journal of Business, 66(2), 295-321
[130] Roll, R. (1977), "A critique of the asset pricing theory's tests; part I: on past and potential
testability of the theory", Journal of Financial Economics, Vol. 4 pp.129-76.
[131] Roy, A. D.(1952) "Safety-First and the Holdings of Assets", Econornetrica 20, 431-49.
[132] Rosenberg, B., Reid, K., Lanstein, R. (1985), "Persuasive evidence of market inefficiency",
Journal of Portfolio Management, Vol. 11 pp.9-17.
[133] Ross, S.A. (1976), "The arbitrage theory of capital asset pricing", Journal of Economic Theory,
Vol. 13 pp.341-60.
[134] Ross, S.A. (1977), "Return, risk and arbitage", in Friend, I., Bicksler, J.I. (Eds),Risk and Return
in Finance, Ballinger, Cambridge, MA, pp.189-218.
[135] Rozeff, M. and W. Kinney (1976), “Capital Market Seasonality: The Case of Stock Returns,”
Journal of Financial Economics 3, 379-402.
[136] Rubinstein, Mark, (1976), The Valuation of Uncertain Income Streams and the Pricing of
Options, Bell Journal of Economics 7, 407-425. , 1985
[137] Rubinstein M., (1973), “The Fundamental Theorem of Parameter-preference Security
Valuation”, Journal of Financial and Quantitative Analysis 8, 61-69.
[138] Sauer, A. and Murphy, A., (1992), “An Empirical Comparisons of Alternative Models of
Capital Asset Pricing in Germany”, Journal of Banking and Finance.
[139] Sharpe, W., Capital asset prices (1964), “A Theory of Market Equilibrium under Conditions of
Risk,” J. Finance, 425-442.
[140] Schwert, G.W. (1989), "Why does stock market volatility change over time?", Journal of
Finance, Vol. 44 pp.1115-53.
[141] Shanken, Jay, (1982) " The Arbitrage Pricing Theory: Is It Testable?," Journal of Finance,
American Finance Association, vol. 37(5), pages 1129-40
[142] Shanken (1987), 'Nonsynchronous Data and the Covariance-Factor Structure of Returns',
Journal of Finance, 42 (2), June
[143] Sortino, F. and S. Satchell, editors. "Managing downside risk in financial markets: Theory,
practice and implementation" Butterworth-Heinemann Finance, 2001.

202
European Journal of Social Sciences – Volume 21, Number 2 (2011)

[144] Shleifer, Andrei, and Robert Vishny, (1992), Liquidation values and debt capacity: A market
equilibrium approach, Journal of Finance 47, 1343-1366.
[145] Stattman, Dennis, (1980), Book values and stock returns, The Chicago MBA: A Journal of
Selected Papers 4, 25-45.
[146] Stambaugh, Robert F., (1982). "On the exclusion of assets from tests of the two-parameter
model: A sensitivity analysis," Journal of Financial Economics.
[147] Steven L. Heston & K. Geert Rouwenhorst & Roberto E. Wessels, 1999. "The Role of Beta and
Size in the Cross-Section of European Stock Returns," European Financial Management,
[148] Susmel , R.,(2001) ”Extreme observations and diversification in Latin America emerging
equity markets” Journal of International Money and Finance, 20.
[149] Tobin, J., (1958). “Liquidity Preference as Behavior towards Risk”. The Review of Economic
Studies, 25(1), pp. 65-86.
[150] Tobin, J. (1958), "Liquidity preference as behaviour towards risk", Review of Economic
Studies, Vol. 26 pp.65-86.
[151] Treynor, J., (1962). “Toward a Theory of Market Value of Risky Assets”, Unpublished
manuscript.
[152] Tversky, A., & Kahneman D. (1992). Advances in prospect theory: Cumulative representation
of uncertainty. Journal of Risk and Uncertainty, 5, 297-323.
[153] Wong, K. A, Tan M. L. (1991), “An Assessment of Risk and Return in the Singapore Stock
Market”, Applied Financial Economics, Vol1, pp 11-20.
[154] Xu, R. (2001), “The CAPM test in China Stock Market: with subsidiary test on Fundamentals
and Returns”, Thesis University of Nottingham.
[155] Zhang, Lu, (2003). “The value premium”, Working paper (University of Rochester, Rochester,
NY).
[156] Zhang, Yi-Cheng, (1999). “Toward a Theory of Marginally Efficient Markets”. Physica A,
269(1), 30–44.

203