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.

CAPM, Downside risk, asymmetry, conditional downside risk, lower partial moments, non-linear kernel, semi-variance
Time-Series Models; Dynamic Quantile Regressions (jel C22), Time-Series Models; Dynamic Quantile Regressions (jel C32), Portfolio Choice; Investment Decisions (jel G11), Asset Pricing (jel G12), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)
hdl.handle.net/1765/1425
ERIM Report Series Research in Management
Erasmus Research Institute of Management

Post, G.T, & van Vliet, P. (2004). Conditional Downside Risk and the CAPM (No. ERS-2004-048-F&A). ERIM Report Series Research in Management. Retrieved from http://hdl.handle.net/1765/1425