  We introduce an equilibrium asset pricing model, which we build on the
relationship between a novel risk measure, the Expected Downside Risk (EDR) and
the expected return. On the one hand, our proposed risk measure uses a
nonparametric approach that allows us to get rid of any assumption on the
distribution of returns. On the other hand, our asset pricing model is based on
loss-averse investors of Prospect Theory, through which we implement the
risk-seeking behaviour of investors in a dynamic setting. By including EDR in
our proposed model unrealistic assumptions of commonly used equilibrium models
- such as the exclusion of risk-seeking or price-maker investors and the
assumption of unlimited leverage opportunity for a unique interest rate - can
be omitted. Therefore, we argue that based on more realistic assumptions our
model is able to describe equilibrium expected returns with higher accuracy,
which we support by empirical evidence as well.
