Conditional Downside Risk and the CAPM
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)|
|ERIM Report Series Research in Management|
|Organisation||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