Two Market Forces in Asset Prices
63 Pages Posted: 15 Mar 2012 Last revised: 5 Aug 2018
Date Written: July 31, 2018
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: Suggested Citation