Sorting out Downside Beta
Downside risk, when properly defined and estimated, helps to explain the cross-section of US stock returns. Sorting stocks by a proper estimate of downside market beta leads to a substantially larger cross-sectional spread in average returns than sorting on regular market beta. This result arises despite the fact that downside beta is based on fewer return observations and therefore is more difficult to estimate and predict. The explanatory power of downside risk remains after controlling for other stock characteristics, including firm-level size, value and momentum.
|Keywords||asset pricing, beta, downside risk, lower partial moments, semi-variance|
|Publisher||Erasmus Research Institute of Management (ERIM)|
Post, G.T., van Vliet, P., & Lansdorp, S.D.. (2009). Sorting out Downside Beta (No. ERS-2009-006-F&A). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/14843