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Dichotomous Asset Pricing Model

Author

Listed:
  • Liang Zou

    (University of Amsterdam)

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 assets 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.

Suggested Citation

  • Liang Zou, 2005. "Dichotomous Asset Pricing Model," Annals of Economics and Finance, Society for AEF, vol. 6(1), pages 185-207, May.
    • Handle: RePEc:cuf:journl:y:2005:v:6:i:1:p:185-207
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    References listed on IDEAS

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    More about this item

    Keywords

    Mean-variance; Gain-loss; Upper-market beta; Lower-market beta; Cross-asset derivative security; Dichotomous asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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