Systematic risk in emerging markets: the D-CAPM |
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| Affiliation: | 1. Technische Universität Bergakademie Freiberg, Schlossplatz 1, DE-09599 Freiberg, Germany;2. University of Edinburgh Business School, EH8 9JS, 29 Buccleuch Place, Edinburgh, UK;3. Dongbei University of Finance and Economics, Department of Finance and Economics, No. 217 JianShan St., Shahekou District, Dalian 116025 Liaoning, PR China;4. University of Vaasa, Department of Accounting and Finance, FI-65101, P.O. Box 700 Vaasa, Finland;1. CREA, University of Luxembourg, Luxembourg;2. IRES, Université Catholique de Louvain, Louvain-la-Neuve, Belgium;1. Harvard University, Littauer Center, Cambridge MA, 02138, USA;2. National Bureau of Economic Research, Cambridge MA, USA;3. Yale School of Management, 165 Whitney Avenue, New Haven CT, 06511, USA;4. London School of Economics, Department of Finance, London, WC2A 2AE, UK;5. Dodge and Cox, 555 California St., San Francisco CA, 94104, USA;1. Department of Finance, Asia University, Taichung 41354, Taiwan;2. Financial Management Department, National Kaohsiung First University of Science and Technology, Kaohsiung 824, Taiwan;3. National Chiao Tung University, Hsinchu 30010, Taiwan |
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| Abstract: | There is by now a growing literature arguing against the use of the CAPM to estimate required returns on equity in emerging markets (EMs). 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 downside CAPM, or D-CAPM for short). The empirical evidence discussed below for the entire Morgan Stanley Capital Indices database of EMs clearly supports the downside beta and the D-CAPM over beta and the CAPM. |
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