The CML/SML slope ratio as a structural, ex-post signal of systemic risk: reinterpreting CAPM during regime shifts

This study revisits the Capital Asset Pricing Model (CAPM) under market stress by examining the slope ratio between the Capital Market Line (CML) and the Security Market Line (SML). Although this ratio simplifies to the inverse of market volatility under standard assumptions, we reinterpret it as an ex-post, regime-sensitive indicator of systemic risk. Using daily data from 2015 to 2024, the ratio is computed over rolling windows and analyzed through rolling CAPM regressions, quantile regressions, and Markov-Switching VAR models. The results reveal that sustained declines in the CML/SML ratio coincide with major stress episodes, including the COVID-19 crisis and the 2022–2023 inflation shock, and align with conventional stress indicators such as the VIX and Value-at-Risk. To enhance interpretation, we introduce a geometric framework—“angular inversion”—showing how the CML flattens and may fall below the SML during turbulent periods, signaling a disruption in risk compensation mechanisms. While strictly descriptive and non-predictive, the CML/SML ratio emerges as a tractable and interpretable diagnostic that complements existing measures of financial instability and strengthens ex-post systemic risk monitoring.