University of Oulu

Rutkowska-Ziarko, A., Markowski, L., Pyke, C., & Amin, S. (2022). Conventional and downside CAPM: The case of London stock exchange. Global Finance Journal, 54, 100759.

Conventional and downside CAPM : the case of London stock exchange

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Author: Rutkowska-Ziarko, Anna1; Markowski, Lesław1; Pyke, Christopher2;
Organizations: 1The Faculty of Economics, University of Warmia and Mazury in Olsztyn, Poland
2Faculty of Business and Justice, University of Central Lancashire, Preston, United Kingdom
3Department of Economics, Oulu Business School, University of Oulu, Finland
Format: article
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 0.6 MB)
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Language: English
Published: Elsevier, 2022
Publish Date: 2022-12-05


Many studies on asset pricing have highlighted the importance of downside risk, in line with the actual losses of investors. In addition, the capital asset pricing model (CAPM), although presented as a universal theory, may provide significantly different rates of return in bull and bear markets. Using the CAPM under different conditions could be regarded as an alternative measurement and valuation approach to downside risk. This paper investigates conventional and downside approaches to risk taking into account different measures of downside beta coefficients. A further contribution of this research is the development of an alternative approach to testing the CAPM relationship. For this purpose, conditional relationships of the CAPM are proposed in which risk premiums are set separately in bull and bear periods. Using equity data and portfolios from the United Kingdom, we obtained positive and statistically significant downside risk premiums. We observed a slight advantage of downside measures over conventional beta measures. Conditional models provide evidence of a positive risk premium in rising markets and a negative risk premium in falling markets. The robustness analysis in subperiods indicates that these findings are largely unchanged for downside beta coefficients, which is not fulfilled by the model in a variance approach.

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Series: Global finance journal
ISSN: 1044-0283
ISSN-E: 1873-5665
ISSN-L: 1044-0283
Volume: 54
Article number: 100759
DOI: 10.1016/j.gfj.2022.100759
Type of Publication: A1 Journal article – refereed
Field of Science: 512 Business and management
Copyright information: © 2022 The Authors. This is an open access article under the CC BY license (