Conditional Volatility Exposures in Asset Pricing in the Downside and Classical Framework

Abstract

In this paper the variance in the residuals of the market model or downside market model is time-varying and has an association with the conditional volatility of the market. This paper empirically models conditional volatility exposures for log-daily returns of assets listed on the Warsaw Stock Exchange. For this purpose, a Factor-ARCH type process is adopted where the exposure of asset volatility to market portfolio (WIG) volatility is estimated in the variance equation. All analyses are made in the downside and standard asset pricing frameworks. This article provides evidence that the conditional volatility of returns on assets (portfolios) has a statistically significant contemporaneous association with market portfolio volatility. The downside volatility beta is statistically higher than its classical equivalent. There is evidence of a significant relationship between classical systematic risk and the average returns on individual assets and portfolios. The results of cross-sectional regressions show that both volatility betas are priced, too.