Downside Risk Premium Based Four-Factor Asset Pricing Model: Empirical Evidence from Nifty50

Investors hunt to decide for investment to develop an effective portfolio in an optimum risk-return framework Markowitz [1]. The pioneer model introduced by sharp [2] with market risk premium as one factor that impacts overall cross-sectional returns of the assets. However, if positive, market risk premium is acceptable by investors or in exchange for their risk when investing in the market. On the other hand, it gives a loss-loss situation when it is negative. In such cases, investors take risks by investing in the market and getting returns less than normal risk-free returns. This leads to a rising question about how stock market risk behaves when the market goes overall with bull or bearish. This research paper tries to develop a model that helps understand the impact of negative and positive risk premium separately on individual stock returns. Through framing downside risk premium and upside risk premium as separate factors in exchange for the market risk premium in the Fama-French three-factor model [3]. The researcher used daily dollar-adjusted returns data from 2004 to 2019 for all 50 constitution stocks from Nifty50 as of August 2021 based on each stock's available trading dates. It clearly shows the impact of downside risk premium significantly for each 50 stocks. On the other side, the upside risk premium is not significantly impacting one of the stock Nestle. So, this four-factor clearly helps to understand stock returns better than market risk premium as one factor.