Comparative Analysis of Capital Asset Pricing Model (CAPM) and Downside Capital Asset Pricing Model (D-CAPM) under Positive and Negative Capital Market Risk Premiums in Tehran Stock Exchange

In capital market, the investor receives some return which is in proportion to the risk he/she bears, and the common approach to measure the risk and estimate expected rate of return is to use pricing models. The present research aims at investigating and thoroughly comparing two pricing models, namely Capital Asset Pricing Model (CAPM) and Downside Capital Asset Pricing Model (D-CAPM) in the Tehran Stock Exchange (TSE) during ۲۰۱۵-۲۰۲۰ over a statistical population composed of ۹۱ firms in ۲۳ different industries. In the first step, beta and downside beta coefficients and market rate of return and share risk premium variables were calculated in both of CAPM and D-CAPM followed by estimating the expected rate of return. Then, depending on the sign (negative or positive) of the market risk premium, rate of return on share (independent variable) and expected rate of return (dependent variables) were separated in the two models. In this way, major and minor hypotheses of the research were developed. Then, statistical software packages (SPSS and Eviews) were utilized to conduct correlation tests and regression analysis and determine minimum significant difference to either confirm or reject the research hypotheses at ۱% error. The research results indicate that, in order to explain the expected return at TSE, one can use D-CAPMand CAPM pricing models. Furthermore, D-CAPM exhibited higher efficiency than CAPM under both negative and positive market risk premiums; that is, D-CAPM model is more efficient than CAPM. This finding is exactly in line with previous research and coincides the theoretical framework of and existing literature on the research topic.

Keywords:

Tehran Stock Exchange (TSE) , Systematic Risk , Downside Beta , D-CAPM , CAPM.