Downside Beta and Downside Gamma: In Search for a Better Capital Asset Pricing Model

In the financial world, importance of “downside risk” and “higher moments” has been emphasized, predominantly in developing countries such as Pakistan, for a substantial period. Consequently, this study tests four models suitable capital asset pricing model. These are CAPM’s beta, beta replaced by skewness (gamma), with gamma, downside CAPM (DCAPM), gamma. The problems high correlation between from regressand point view is resolved constructing double-sorted portfolio each factor loading. problem and, similarly, orthogonalizing risk measure two-factor setting. Standard two-pass regression applied, results reported analyzed terms R2, significance loadings, risk–return relationship proxies beta/gamma based on Hogan Warren, Harlow Rao, Estrada. indicate that single beta/downside or even gamma/downside gamma not better choice among all proxies. However, factors rejected at 5% 1% level different obvious an model two measures.