Market and Accounting Risk Factors of Asset Pricing in the Classical and Downside Approaches

Anna Rutkowska-Ziarko, Lesław Markowski

Abstract


Theoretical background: The variability of the company’s profitability is the result of the accompanying risk. To compare the profitability of many companies, relative profitability measures, which include profitability ratios, are more convenient. This article analyses market and accounting risk factors of CAPM. Risk was considered in variance and downside framework. Market betas, accounting betas were used in an extended version of the asset pricing model. Additionally, the influence of profitability ratios, such as ROA and ROE on the average rate of return on the capital market are considered.

Purpose of the article: The main purpose of this study is to test the standard and extended CAPM relations between systematic risk measures and mean returns for single companies quoted on the Polish capital market and equally-weighted portfolios in two approaches: variance and downside risk.

Research methods: The research based on individual securities and portfolios, compares the one-factor risk-return relationships with two-factor ones estimated using mean returns in cross-sectional regressions. The regressors were expressed in absolute terms and classical and downside beta coefficients. The sample includes companies differing in terms of size and across different industries.

Main findings: Portfolios with higher classical or downside market betas generate higher mean returns. The negative risk premium for accounting betas for variance and downside risk was identified. It is not in accordance with our earlier study of the Polish construction sector, where a positive and significant risk premium for downside accounting betas was found. The highest explanatory power of rates on returns on the Polish capital market were found for average ROA and ROE. This confirms the results of the previous studies on the Polish capital market for food and construction sectors.


Keywords


downside risk; accounting beta; CAPM; ROA; ROE

Full Text:

PDF

References


Ali, H. (2019). Does downside risk matter more in asset pricing? Evidence from China. Emerging Markets Review, 39(C), 154–174. doi:10.1016/j.ememar.2019.05.001

Amorim, A., Lima, I., & Murcia, F. (2012). The effect of the firm’s capital structure on the systematic risk of common stocks. Cont. Fin. – USP, São Paulo, 23(60), 199–211.

Ang, A., Chen, J., & Xing, Y. (2006). Downside risk. The Review of Financial Studies, 19(4), 1191–1239. doi:10.1093/rfs/hhj035

Bawa, V.S., & Lindenberg, E.B. (1977). Capital market equilibrium in a mean-lower partial moment framework. Journal of Financial Economics, 5(2), 189–200. doi:10.1016/0304-405X(77)90017-4

Campbell, J., Polk, C., & Voulteenaho, T. (2010). Growth or glamour? Fundamentals and systematic risk in stock returns. The Review of Financial Studies, 23(1), 305–344. doi:10.1093/rfs/hhp029

Estrada, J. (2002). Systematic risk in emerging markets: the D-CAPM. Emerging Markets Review, 3(4), 365–379. doi:10.1016/S1566-141(02)00042-0

Estrada, J. (2007). Mean-semivariance behaviour: Downside risk and capital asset pricing. International Review of Economics & Finance, 16(2), 169–185. doi:10.1016/j.iref.2005.03.003

Fama, E.F., & French, K.R. (2018). Choosing factors. Journal of Financial Economics, 128(2), 234–252. doi:10.1016/j.jfieco.2018.02.012

Galagedera, U.A. (2009). Economic signifiance of downside risk in developed and emerging markets. Applied Economics Letters, 16(16), 1627–1632. doi:10.1080/13504850701604060

Harlow, W.V., & Rao, R.K.S. (1989). Asset pricing in a generalized mean-lower partial moment framework: Theory and evidence. Journal of Financial and Quantitative Analysis, 24(3), 285–311. doi:10.2307/2330813

Hill, N.C., & Stone, B.K. (1980). Accounting betas, systematic operating risk, and fiancial leverage: A risk-composition approach to the determinants of systematic risk. The Journal of Financial and Quantitative Analysis, 15(3), 595–637. doi:10.2307/2330401

Konchitchki, Y., Luo, Y., Ma, M.L.Z., & Wu, F. (2016). Accounting-based downside risk, cost of capital, and macroeconomy. Review of Accounting Studies, 21, 1–36. doi:10.1007/s11142-015-9338-7

Mamoghli, C., & Daboussi, S. (2010). Capital asset pricing models and performance measures in the downside risk framework. Journal of Emerging Market Finance, 9(2), 95–130. doi:10.1177%2F097265271000900201

Post, T., & Vliet, P.V. (2006). Downside risk and asset pricing. Journal of Banking and Finance, 30(3), 823–849. doi:10.1016/j.jbankfi.2005.06.005

Rutkowska-Ziarko, A. (2015). Influence of profitability ratio and company size on profitability and investment risk in the capital market. Folia Oeconomica Stetinesia, 15(23), 151–161. doi:10.1515/foli-2015-0025

Rutkowska-Ziarko, A., & Pyke, C. (2017). The development of downside accounting beta as a measure of risk. Economics and Business Review, 45(4), 55–65. doi:10.18559/ebr.2017.4.4

Rutkowska-Ziarko, A., & Pyke, C. (2018). Validating downside accounting beta: Evidence from the Polish construction industry. In K. Jajuga, H. Locarek-Junge, L. Orłowski (eds.), Contemporary Trends and Challenges in Finance (pp. 81–87). Proceedings from the 3 rd Wroclaw International Conference in Finance. doi:10.1007/978-3-319-76228-9_8

Rutkowska-Ziarko, A., Markowski, L., & Pyke, C. (2019). Accounting beta in the extended version of CAPM. In K. Jajuga, H. Locarek-Junge, L. Orłowski, K. Staehr (eds.), Contemporary Trends and Challenges in Finance (pp. 147–156). Proceedings from the 4th Wroclaw International Conference

in Finance.

Sarmiento-Sabogal, J., & Sadeghi, M. (2015). Estimating the cost of equity for private fims using accounting fundamentals. Applied Economics, 47(3), 288–230. doi:10.1080/00036846.2014.969826

Stancu, I., & Stancu, A. (2014). Revisiting multifactor models on the Bucharest Stock Exchange. Economic Computation & Economic Cybernetics Studies & Research, 48(3), 309–324.

Thuy, T.T., & Kim, J. (2018). Sustainability managed against downside risk and the cost of equity: Evidence in Korea. Sustainability, 10(11), 1–18. doi:10.3390/su10113969

Tsai, H., Chen, M., & Yang, C. (2014). A time-varying perspective on the CAPM and downside betas. International Review of Economics and Finance, 29, 440–454. doi:10.1016/j.iref.2013.07.006

Włodarczyk, B. (2018). Rynek surowców a ryzyko bankowe (w ujęciu ryzyka rynkowego i surowcowego). Olsztyn: Wydawnictwo Uniwersytetu Warmińsko-Mazurskiego.

Zaremba, A., Czapkiewicz, A. (2017). Digesting anomalies in emerging European markets: A comparison of factor pricing models. Emerging Markets Review, 31, 1–15. doi:10.1016/j.ememar.2016.12.002




DOI: http://dx.doi.org/10.17951/h.2020.54.2.103-112
Date of publication: 2020-06-29 12:10:48
Date of submission: 2020-01-21 12:48:03


Statistics


Total abstract view - 1163
Downloads (from 2020-06-17) - PDF - 0

Indicators



Refbacks

  • There are currently no refbacks.


Copyright (c) 2020 Anna Rutkowska-Ziarko, Lesław Markowski

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.