Market-Beta and Downside Risk

Levi, Yaron; Welch, Ivo

doi:10.2139/ssrn.3000824

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Market-Beta and Downside Risk

50 Pages Posted: 18 Jul 2017 Last revised: 14 May 2020

See all articles by Yaron Levi

Yaron Levi

University of Southern California - Marshall School of Business

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: October 22, 2018

Abstract

The plain market-beta was a good predictor of stock returns not only during bull and ordinary markets, but also during bear markets and crashes. Thus, it was indeed a good measure of the hedge against market risk. This plain beta also predicted the subsequent down-beta (i.e., measured only on days when the stock market declined) better than the prevailing down-beta. Stocks with higher ex-ante down-betas did not earn a positive risk premium. We conclude that ex-ante down-betas were neither useful hedging nor useful risk-pricing measures.

Keywords: Market Beta, Crash Risk

JEL Classification: G11, G12

Suggested Citation: Suggested Citation

Levi, Yaron and Welch, Ivo, Market-Beta and Downside Risk (October 22, 2018). Available at SSRN: https://ssrn.com/abstract=3000824 or http://dx.doi.org/10.2139/ssrn.3000824