Sorting Out Downside Beta
Koc University - Graduate School of Business
Pim van Vliet
Robeco Asset Management - Quantitative Strategies
Simon D. Lansdorp
Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute
October 10, 2012
This study analyzes various measures of the downside beta of stocks. Downside beta is sometimes defined and estimated in different ways. Theoretically, an approach based on the mean-semi-variance equilibrium model appears superior. Two known alternative approaches are not consistent with the basic principles of coherent risk measures and the properties of a well-behaved pricing kernel. Moreover, to achieve superior out-of-sample predictive power, it is essential to estimate the downside beta definition that follows from the theory. Using monthly stock-level data, the downside beta premium, if properly defined and estimated, is roughly four to seven percent per annum, depending on the model specification and sample period, compared with a premium of zero to three percent for regular market beta.
Number of Pages in PDF File: 28
Keywords: Asset pricing, downside beta, CAPM, downside risk, semi-variance
JEL Classification: C22, C32, G11, G12
Date posted: January 6, 2012 ; Last revised: October 10, 2012
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