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Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence

Published online by Cambridge University Press:  06 April 2009

W. V. Harlow  and
Ramesh K. S. Rao
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Abstract

A new asset pricing model that generalizes earlier results in the downside risk literature is developed and empirically tested using a multivariate approach. By specifying risk as deviations below any arbitrary target rate of return, the generalized Mean-Lower Partial Moment (MLPM) model overcomes the limited appeal of earlier formulations, and, moreover, a large class of extant pricing models using alternative risk measures (variance, semivariance, semideviation, probability of loss, etc.) becomes special cases of the new framework. Empirical tests indicate that the new model cannot be rejected against an unspecified alternative for a large set of target rates of return. The traditional CAPM, on the other hand, is rejected as a well-specified alternative. The MLPM target rates inferred from market data appear to be related to equity market mean returns rather than to the riskfree rate, the target rate that is implicit in the CAPM and explicit in earlier downside risk formulations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 3 , September 1989 , pp. 285 - 311
Copyright
Copyright © School of Business Administration, University of Washington 1989

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