IDEAS home Printed from https://ideas.repec.org/a/sae/emffin/v11y2012i3p271-300.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0972652712466498
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0972652712466498?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Keith Lam, 2001. "The conditional relation between beta and returns in the Hong Kong stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 11(6), pages 669-680.
    2. Scott, Robert C & Horvath, Philip A, 1980. "On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, vol. 35(4), pages 915-919, September.
    3. Lakonishok, Josef & Shapiro, Alan C., 1986. "Systematic risk, total risk and size as determinants of stock market returns," Journal of Banking & Finance, Elsevier, vol. 10(1), pages 115-132, March.
    4. John Lintner, 1965. "Security Prices, Risk, And Maximal Gains From Diversification," Journal of Finance, American Finance Association, vol. 20(4), pages 587-615, December.
    5. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    6. 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(3), pages 285-311, September.
    7. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    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. Berglund, Tom & Liljeblom, Eva & Loflund, Anders, 1989. "Estimating betas on daily data for a small stock market," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 41-64, March.
    10. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mohmmad Enamul Hoque & Soo Wah Low & Mohd Azlan Shah Zaidi, 2020. "Do Oil and Gas Risk Factors Matter in the Malaysian Oil and Gas Industry? A Fama-MacBeth Two Stage Panel Regression Approach," Energies, MDPI, vol. 13(5), pages 1-15, March.
    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.
    4. Rutkowska-Ziarko, Anna & Markowski, Lesław & Pyke, Christopher & Amin, Saqib, 2022. "Conventional and downside CAPM: The case of London stock exchange," Global Finance Journal, Elsevier, vol. 54(C).
    5. Rutkowska – Ziarko, Anna & Markowski, Lesław & Abdou, Hussein A., 2024. "Conditional CAPM relationships in standard and accounting risk approaches," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Leitner Johannes, 2005. "Optimal portfolios with expected loss constraints and shortfall risk optimal martingale measures," Statistics & Risk Modeling, De Gruyter, vol. 23(1/2005), pages 49-66, January.
    2. Chokri Mamoghli & Sami Daboussi, 2010. "Capital Asset Pricing Models and Performance Measures in the Downside Risk Framework," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(2), pages 95-130, August.
    3. Houda Hafsa & Dorra Hmaied, 2012. "Are Downside Higher Order Co-Moments Priced? : Evidence From The French Market," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(1), pages 65-81.
    4. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    5. Post, G.T., 2003. "Asset prices and omitted moments; A stochastic dominance analysis of market efficiency," ERIM Report Series Research in Management ERS-2003-017-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    6. Yuanyao Ding & Bo Zhang, 2009. "Risky asset pricing based on safety first fund management," Quantitative Finance, Taylor & Francis Journals, vol. 9(3), pages 353-361.
    7. Valadkhani, Abbas, 2023. "Asymmetric downside risk across different sectors of the US equity market," Global Finance Journal, Elsevier, vol. 57(C).
    8. Chi-Hsiou Hung, 2007. "Momentum, Size and Value Factors versus Systematic Co-moments in Stock Returns," Department of Economics Working Papers 2007_02, Durham University, Department of Economics.
    9. Liu, Jinjing, 2023. "A novel downside beta and expected stock returns," International Review of Financial Analysis, Elsevier, vol. 85(C).
    10. Huang, Tao & Li, Junye, 2019. "Option-Implied variance asymmetry and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 21-36.
    11. Dipankar Mondal & N. Selvaraju, 2022. "Convexity, two-fund separation and asset ranking in a mean-LPM portfolio selection framework," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 44(1), pages 225-248, March.
    12. Gniadkowska-Szymańska Agata, 2017. "The impact of trading liquidity on the rate of return on emerging markets: the example of Poland and the Baltic countries," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 13(4), pages 136-148, December.
    13. repec:ers:journl:v:xxiv:y:2021:i:4:p:370-395 is not listed on IDEAS
    14. Toker Doganoglu & Christoph Hartz & Stefan Mittnik, 2007. "Portfolio optimization when risk factors are conditionally varying and heavy tailed," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 333-354, May.
    15. Chenglu Jin & Thomas Conlon & John Cotter, 2023. "Co-Skewness across Return Horizons," Journal of Financial Econometrics, Oxford University Press, vol. 21(5), pages 1483-1518.
    16. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    17. Mohammad Najand & John Griffith & David C Marlett, 2007. "Do life insurance stocks provide superior returns?," Journal of Asset Management, Palgrave Macmillan, vol. 8(1), pages 52-57, May.
    18. Anna Rutkowska-Ziarko & Lesław Markowski, 2022. "Accounting and Market Risk Measures of Polish Energy Companies," Energies, MDPI, vol. 15(6), pages 1-21, March.
    19. Guo, Hui & Savickas, Robert & Wang, Zijun & Yang, Jian, 2009. "Is the Value Premium a Proxy for Time-Varying Investment Opportunities? Some Time-Series Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 133-154, February.
    20. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521547871, September.
    21. Martin Kipp & Christian Koziol, 2022. "Tail risk management and the skewness premium," Journal of Asset Management, Palgrave Macmillan, vol. 23(6), pages 534-546, October.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:emffin:v:11:y:2012:i:3:p:271-300. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.ifmr.ac.in .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.