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Sorting Out Downside BetaThierry PostKoc University - Graduate School of Business Pim Van VlietRobeco Asset Management - Quantitative Strategies Simon D. LansdorpRobeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute October 10, 2012 Abstract: 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 working papers seriesDate posted: January 6, 2012 ; Last revised: October 10, 2012Suggested CitationContact Information
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