Two Market Forces in Asset Prices

63 Pages Posted: 15 Mar 2012 Last revised: 5 Aug 2018

See all articles by Wei Liu

Wei Liu

Texas A&M University - Department of Finance

James W. Kolari

Texas A&M University - Department of Finance

Jianhua Huang

Texas A&M University - Department of Statistics

Date Written: July 31, 2018

Abstract

This paper utilizes Black's (1972) zero-beta CAPM to derive an alternative form dubbed the ZCAPM. The ZCAPM posits that asset prices are a function of market risk composed of two components: average market returns and cross-sectional market volatility. Market risk associated with average market returns in the CAPM market model is known as beta risk. We refer to market risk related to cross-sectional market volatility as zeta risk. Using U.S. stock returns from January 1965 to December 2015, out-of-sample cross-sectional asset pricing tests show that both market forces in the ZCAPM are significantly priced with t-values typically exceeding 3.0 in different test asset portfolios.These and other empirical tests lead us to conclude that the ZCAPM represents a major breakthrough in asset pricing models.

Keywords: asset pricing, zero-beta CAPM, market volatility

JEL Classification: G12

Suggested Citation

Liu, Wei and Kolari, James W. and Huang, Jianhua, Two Market Forces in Asset Prices (July 31, 2018). Available at SSRN: https://ssrn.com/abstract=2022384 or http://dx.doi.org/10.2139/ssrn.2022384

Wei Liu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Jianhua Huang

Texas A&M University - Department of Statistics ( email )

155 Ireland Street
447 Blocker
College Station, TX 77843
United States

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