Conditional Downside Risk and the CAPM
2004-07-28
Research Paper
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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.
Keywords
- lower partial moments
- asymmetry
- CAPM
- Downside risk
- conditional downside risk
- non-linear kernel
- semi-variance
Classifications using
Journal of Economic Literature (JEL) Classification System
- G11 : Portfolio Choice; Investment Decisions
- G12 : Asset Pricing
- C32 : Time-Series Models; Dynamic Quantile Regressions
- G3 : Corporate Finance and Governance
- M : Business Administration and Business Economics; Marketing; Accounting
- C22 : Time-Series Models; Dynamic Quantile Regressions
Automatically Extracted Terms
- portfolio
- downside
- model
- kernel
- return
- downside beta
- market
- stock
- downside risk
- pricing
- result
- panel
- ms capm
- dividend
- sample
- alpha
- state
- market risk premium
- figure
- table
