ASYMMETRIC ASSET PRICING AND DOWNSIDE RISK SENSITIVITY IN INDIAN MUTUAL FUNDS: EVIDENCE FROM D-CAPM AND LOWER PARTIAL MOMENTS
DOI:
https://doi.org/10.53555/kjzhhd47Keywords:
Downside CAPM, Lower Partial Moments, Asymmetric Asset Pricing, Downside Beta, Downside Risk, Mutual FundsAbstract
A growing body of financial literatures support asymmetric and downside-oriented asset pricing frameworks as investors are considerably more sensitive to market downturns. This asymmetry is highly relevant in the mutual fund context where downside protection is the primary concern of risk-averse investors. The applicability of D-CAPM and Lower Partial Moment in the Indian mutual funds, particularly in the post reclassification period, has yet to be systematically examined which constitute a significant research gap. This research empirically evaluates downside risk sensitivity and asymmetric asset pricing of Indian equity mutual funds by employing D-CAPM and LPM2. Downside beta estimates are obtained by regressing fund excess returns on market excess returns conditional on negative market movements, while downside risk sensitivity is measured by employing LPM2 with a target return of zero. Using monthly return data for four years, the study examines whether downside risk explains cross-sectional variations in downside risk exposure across funds. Results indicate the existence of substantial variations in downside risk exposure with statistically significant βD. However, cross-sectional regression reveals that LPM2 does not significantly explain variations in βD, suggesting that downside risk and market sensitivity capture distinct risk dimensions. It signifies the importance of asymmetric risk evaluation of mutual funds as these measures yield incremental information.
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