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Mean-semivariance behavior (II): The D-CAPM

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  • Estrada, Javier

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    (IESE Business School)

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    Abstract

    For over 30 years academics and practitioners have been debating the merits of the CAPM. One of the characteristics of this model is that it measures risk by beta, which follows from an equilibrium in which investors display mean-variance behavior. In that framework, risk is assessed by the variance of returns, a questionable and restrictive measure of risk. The semivariance of returns is a more plausible measure of risk and can be used to generate an alternative behavioral hypothesis (mean-semivariance behavior), an alternative measure of risk for diversified investors (the downside beta), and an alternative pricing model (the D-CAPM). The empirical evidence discussed in this article for the entire MSCI database of developed and emerging markets clearly supports the downside beta and the D-CAPM over beta and the CAPM.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/493.

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    Length: 20 pages
    Date of creation: 25 Feb 2003
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0493

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    Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/
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    Keywords: downside risk; semideviation; asset pricing;

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    1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    2. Estrada, Javier, 2002. "Systematic risk in emerging markets: the," Emerging Markets Review, Elsevier, vol. 3(4), pages 365-379, December.
    3. Rene M. Stulz, 1999. "Globalization of Equity Markets and the Cost of Capital," NBER Working Papers 7021, National Bureau of Economic Research, Inc.
    4. Harlow, W. V. & Rao, Ramesh K. S., 1989. "Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 285-311, September.
    5. Hogan, William W. & Warren, James M., 1974. "Toward the Development of an Equilibrium Capital-Market Model Based on Semivariance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(01), pages 1-11, January.
    6. Markowitz, Harry M., 1990. "Foundations of Portfolio Theory," Nobel Prize in Economics documents 1990-1, Nobel Prize Committee.
    7. René M. Stulz, 1995. "Globalization Of Capital Markets And The Cost Of Capital: The Case Of Nestlé," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(3), pages 30-38.
    8. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Capital market equilibrium in a mean-lower partial moment framework," Journal of Financial Economics, Elsevier, vol. 5(2), pages 189-200, November.
    9. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-17, June.
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