Pedersen, Christian S. and Hwang, Soosung (2002) On empirical risk measurement with asymmetric returns data. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

By formulating a nested test of the asymmetric response model of Bawa, Brown, and Klein (1981), the mean-lower partial moment CAPM (LPMCAPM) of Bawa and Lindenberg (1977) and the mean-variance CAPM of Sharpe (1963, 1964), Lintner (1965) and Mossin (1969), this paper investigates the relative merits of symmetric and asymmetric risk measures using UK equity data for differently sized companies and at different frequencies. Our analysis shows that, when equity returns are not normal - which is the case for most daily and weekly returns, and for a large portion of smaller firms - the CAPM is rejected in 30%-50% of cases, and the optimal choice of alternative model is LPM-CAPM in over two thirds of these. These, and our further results, have strong consequences for the accurate measurement of equity risk, performance and prices, as downside and/or asymmetric risk measures often outperform the traditional CAPM framework, thus rendering it’s related and widely-used current approaches sub-optimal for some company sizes/data frequency combinations.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Risk management, Rate of return, Small business -- Finance, Distribution (Probability theory)
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	29 August 2002
Number:	No.02-
Number of Pages:	42
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/1809

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