This work utilizes zero-beta CAPM to derive an alternative form dubbed the ZCAPM. The ZCAPM posits that asset prices are a function of market risk composed of two components: average market returns and cross-sectional market volatility. Market risk associated with average market returns in the CAPM market model is known as beta risk. We refer to market risk related to cross-sectional market volatility as zeta risk. Using U.S. stock returns from January 1965 to December 2010, out-of-sample cross-sectional asset pricing tests show that the ZCAPM better predicts stock returns than popular three- and four-factor models. These and other empirical tests lead us to conclude that the ZCAPM holds promise as a robust asset pricing model.
