Capital market equilibrium in a mean-lower partial moment framework

In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive formulae for the equilibrium values of risky assets that hold for arbitrary probability distributions. We show that when the probability distributions and portfolio return...

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Bibliographic Details
Published in:Journal of financial economics 1977-11, Vol.5 (2), p.189-200
Main Authors: Bawa, Vijay S., Lindenberg, Eric B.
Format: Article
Language:English
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Summary:In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive formulae for the equilibrium values of risky assets that hold for arbitrary probability distributions. We show that when the probability distributions and portfolio returns are either normal, stable (with the same characteristic exponent between 1 and 2 and the same skewness parameter, not necessarily zero), or Student- t distributions, our CAPM reduces to the traditional mean-scale CAPM's. Consequently, since the traditional equilibrium models are special cases of our model, the mean-lower partial moment framework is guaranteed to do at least as well in explaining market data. As an application of our theory, we derive an acceptance criterion for capital investment projects and note that corporate finance theory results developed, for example, in the well-known mean- variance framework carry over to the mean-lower partial moment framework.
ISSN:0304-405X
1879-2774
DOI:10.1016/0304-405X(77)90017-4