An Asymmetric Capital Asset Pricing Model

TL;DR

This paper introduces an asymmetric capital asset pricing model that better captures market risk by considering the different impacts of rising and falling prices on long and short positions, improving risk measurement accuracy.

Contribution

It proposes a novel asymmetric CAPM that accounts for position-dependent risks, addressing limitations of symmetric models and aligning more closely with real market behaviors.

Findings

Apple stock is more volatile for short sellers than for long investors.

Long investors in Apple face lower volatility than the market, contrary to standard models.

The asymmetric model has significant implications for expected returns and hedging strategies.

Abstract

Providing a measure of market risk is an important issue for investors and financial institutions. However, the existing models for this purpose are per definition symmetric. The current paper introduces an asymmetric capital asset pricing model for measurement of the market risk. It explicitly accounts for the fact that falling prices determine the risk for a long position in the risky asset and the rising prices govern the risk for a short position. Thus, a position dependent market risk measure that is provided accords better with reality. The empirical application reveals that Apple stock is more volatile than the market only for the short seller. Surprisingly, the investor that has a long position in this stock is facing a lower volatility than the market. This property is not captured by the standard asset pricing model, which has important implications for the expected returns and hedging designs.