Asset pricing: Downside risk across U.S. industries
|Author:||Bc. Peter Palovič|
|Year:||2021 - summer|
|Leaders:|| Mgr. Ing. Matěj Nevrla
|Work type:|| Bachelors
|Awards and prizes:|
|Abstract:||This thesis investigates the comparative relationship between the traditional
CAPM and the downside risk CAPM. It proposes an asset pricing model in
which the traditional CAPM beta and DR-CAPM beta are the risk factors.
The goal of this thesis is to examine whether DR-CAPM beta represents a
significant risk factor that could be used when computing the risk premium
of the portfolio in the market. Therefore, this thesis referred to the FamaMacBeth two-stage regression model that was applied over monthly data of
48 US industries’ realized returns ranging from January, 1970 to January,
2021. Results indicate a non-significant relationship between the risk factors (traditional and downside beta) and expected return. Hence, there is
no evidence that both factors have any significant explanatory power in the
cross-section of stock returns. Moreover, we performed a robustness check of
the results using univariate models, relative beta and unconditional approach.
All of these models confirmed our results from the conditional approach.