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Conditional Relation between Systematic Risk and Returns in the Conventional and Downside Frameworks: Evidence from the Indonesian Market

Author

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  • Nurjannah

    (Nurjannah, Lecturer, Statistics Study Program, Department of Mathematics, Faculty of Science, Brawijaya University, Jl. Veteran Malang 65145, Indonesia. E-mail: nj_anna@ub.ac.id)

  • Don U.A. Galagedera
  • Robert Brooks

    (Robert Brooks, Professor, Department of Econometrics and Business Statistics, Monash University, 900 Dandenong Road, Caulfield East, Victoria 3145, Australia. E-mail: Robert.Brooks@monash.edu)

Abstract

Unconditional pricing models fail to support a positive risk–return trade-off. When excess market return is negative an inverse relationship between the capital asset pricing model (CAPM) beta and equal-weighted and value-weighted portfolio return is observed. To accommodate market movement in the pricing model, two volatility regimes (high/low) is delineated by specifying a threshold on conditional market volatility estimated via a generalised autoregressive conditional heteroscedasticity (GARCH) process. In the low volatility regime, the CAPM beta risk premium and the downside beta risk premium are negative. This observation is robust to the level of the threshold used and is more pronounced in value-weighted portfolios. When the market condition and market movement is incorporated together as conditioning variables, a strong relationship between CAPM beta and return is uncovered. JEL Classification: G12

Suggested Citation

  • Nurjannah & Don U.A. Galagedera & Robert Brooks, 2012. "Conditional Relation between Systematic Risk and Returns in the Conventional and Downside Frameworks: Evidence from the Indonesian Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 11(3), pages 271-300, December.
    • Handle: RePEc:sae:emffin:v:11:y:2012:i:3:p:271-300
    DOI: 10.1177/0972652712466498
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    References listed on IDEAS

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    Cited by:

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    2. Nida SHAH* & Javaid DARS* & Ambreen ZEB**, 2015. "Market Varying Conditional Risk-Return Relationship," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 25(1), pages 25-43.
    3. Lesław Markowski, 2019. "Stock market situation and relations between beta coefficients and returns determined by the CAPM on the example of companies from the ICT sector," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 54, pages 393-408.
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    6. Anna Rutkowska-Ziarko, 2022. "Market and Accounting Measures of Risk: The Case of the Frankfurt Stock Exchange," Risks, MDPI, vol. 10(1), pages 1-17, January.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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