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Conditional Downside Risk and the CAPM

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  • Post, G.T.
  • Vliet, P. van

Abstract

The mean-semivariance CAPM strongly outperforms the traditional mean-variance CAPM in terms of its ability to explain the cross-section of US stock returns. If regular beta is replaced by downside beta, the traditional risk-return relationship is restored. The downside betas of low-beta stocks are substantially higher than the regular betas, while high-beta stocks involve less systematic downside risk than suggested by their regular betas. This pattern is especially pronounced during bad states-of-the-world, when the market risk premium is high. In sum, our results provide evidence in favor of market portfolio efficiency, provided we account for conditional downside risk.

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File URL: http://hdl.handle.net/1765/1425
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Bibliographic Info

Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2004-048-F&A.

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Date of creation: 28 Jul 2004
Date of revision:
Handle: RePEc:dgr:eureri:30001555

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Web page: http://www.erim.eur.nl/

Related research

Keywords: lower partial moments; asymmetry; CAPM; Downside risk; conditional downside risk; non-linear kernel; semi-variance;

References

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  9. Post, G.T. & Vliet, P. van, 2004. "Downside Risk and Asset Pricing," Research Paper ERS-2004-018-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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Citations

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Cited by:
  1. Olmo, J., 2007. "An asset pricing model for mean-variance-downside-risk averse investors," Working Papers 07/01, Department of Economics, City University London.
  2. Chollete, Loran & de la Pena , Victor & Lu, Ching-Chih, 2009. "International Diversification: An Extreme Value Approach," UiS Working Papers in Economics and Finance 2009/26, University of Stavanger.
  3. Fong, Wai Mun & Lean, Hooi Hooi & Wong, Wing Keung, 2008. "Stochastic dominance and behavior towards risk: The market for Internet stocks," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 194-208, October.
  4. Miralles Marcelo, José Luis & Miralles Quirós, María Del Mar & Miralles Quirós, José Luis., 2007. "Análisis Media-semivarianza: Una Aplicación A Las Primas De Riesgo En El Mercado De Valores Español/Mean-semivariance Analysis: An Application To Risk Premiums In The Spanish Stock Market," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 25, pages 199-214, Abril.

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