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Bear beta

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  • Lu, Zhongjin
  • Murray, Scott

Abstract

We test whether bear market risk, time variation in the probability of future bear market states, is priced. We construct an Arrow–Debreu security that pays off in bear market states (AD Bear) from traded Standard & Poor’s (S&P) 500 index options and use its returns to measure bear market risk. We find that bear beta (exposure to bear market risk) has a strong relation with expected stock returns that is robust, persistent, and remains strong among liquid and large stocks. Historical bear beta also predicts future bear market risk exposure. We conclude that bear market risk is priced in the cross section of stock returns.

Suggested Citation

  • Lu, Zhongjin & Murray, Scott, 2019. "Bear beta," Journal of Financial Economics, Elsevier, vol. 131(3), pages 736-760.
    • Handle: RePEc:eee:jfinec:v:131:y:2019:i:3:p:736-760
    DOI: 10.1016/j.jfineco.2018.09.006
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    More about this item

    Keywords

    Arrow–Debreu state prices; Bear beta; Bear market risk; Downside risk; Factor models;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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