A New Asset Pricing Model based on the Zero-Beta CAPM: Theory and Evidence
Institution: | Texas A&M University |
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Department: | |
Year: | 2013 |
Keywords: | Asset Pricing |
Record ID: | 2023034 |
Full text PDF: | http://hdl.handle.net/1969.1/149521 |
This work utilizes zero-beta CAPM to derive an alternative form dubbed the ZCAPM. The ZCAPM posits that asset prices are a function of market risk composed of two components: average market returns and cross-sectional market volatility. Market risk associated with average market returns in the CAPM market model is known as beta risk. We refer to market risk related to cross-sectional market volatility as zeta risk. Using U.S. stock returns from January 1965 to December 2010, out-of-sample cross-sectional asset pricing tests show that the ZCAPM better predicts stock returns than popular three- and four-factor models. These and other empirical tests lead us to conclude that the ZCAPM holds promise as a robust asset pricing model.