Risk Measure And The CAPM

Downside risk measures have an intuitive superiority, since it focuses on the downside movement of asset returns. In order to capture the investors' different risk preference in different market conditions, this paper introduces a switching risk measure.Given some assumptions, I can obtain MLPM CAPM in the mean lower partial moment framework, as MV CAPM in the mean variance analysis.For the purpose of imposing economic conditions, I phrase my empirical research in the pricing kernel framework, and I construct a statistics to compare the CAPMs in the spirit of Hansen-Jagannathan approach. Since the different market proxy may lead to different result, this paper use three different weighting schemes. To guarantee the consistency of the returns data, I use the same weighting scheme as the market proxy when constructing benchmark portfolios.The rankings of the three different CAPMs confirm the paper's idea. Even though the downside risk measure does not exhibit its intuitive superiority due to discarding too much information, the performance of switching measure meets the expectation. It captures the risk preference of the investors better then the other two risk measures. I then use two different risk free interest rates to check the sensitivity, and compare the the three CAPMs using fitted estimating approach. The results confirm the advantage of switching risk measure.