Dichotomous Asset Pricing Model

Annals of Economics and Finance, May 2005

30 Pages Posted: 10 Apr 2005

See all articles by Liang Zou

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB)

Abstract

Cross-asset derivative securities are studied and a dichotomous asset pricing model (DAPM) is derived that significantly enriches the Sharpe-Lintner-Black capital-asset pricing model. An asset's beta is shown to be observable ex ante through the price of its cross-market call or put, and the DAPM separately predicts the assets' expected return - beta relations under the upper-market and lower-market conditions. A sufficient condition for the DAPM to hold is that assets' return distributions satisfy Ross' (1978) two-fund separation property, which implies that any well-diversified portfolio is both mean-variance and gain-loss efficient.

Keywords: Mean-variance, gain-loss, upper-market beta, lower-market beta, cross-asset derivative security, dichotomous asset pricing

JEL Classification: G12

Suggested Citation

Zou, Liang, Dichotomous Asset Pricing Model. Annals of Economics and Finance, May 2005, Available at SSRN: https://ssrn.com/abstract=687118

Liang Zou (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

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