Unconditional pricing models fail to support a positive risk–return trade-off. When excess market return is negative an inverse relationship between the capital asset pricing model (CAPM) beta and equal-weighted and value-weighted portfolio return is observed. To accommodate market movement in the pricing model, two volatility regimes (high/low) is delineated by specifying a threshold on conditional market volatility estimated via a generalised autoregressive conditional heteroscedasticity (GARCH) process. In the low volatility regime, the CAPM beta risk premium and the downside beta risk premium are negative. This observation is robust to the level of the threshold used and is more pronounced in value-weighted portfolios. When the market condition and market movement is incorporated together as conditioning variables, a strong relationship between CAPM beta and return is uncovered.
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