Is There an Intertemporal Relation between Downside Risk and Expected Returns?

37 Pages Posted: 18 Jul 2009 Last revised: 27 Feb 2012

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

K. Ozgur Demirtas

Sabanci University Graduate School of Management

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University

Date Written: July 15, 2009

Abstract

This paper examines the intertemporal relation between downside risk and expected stock returns. Value at risk (VaR), expected shortfall, and tail risk are used as measures of downside risk to determine the existence and significance of a risk-return tradeoff. We find a positive and significant relation between downside risk and the portfolio returns on NYSE/AMEX/Nasdaq stocks. VaR remains a superior measure of risk when compared to the traditional risk measures. These results are robust across different stock market indices, different measures of downside risk, loss probability levels, and after controlling for macroeconomic variables and volatility over different holding periods as originally proposed by Harrison and Zhang (1999).

Keywords: Downside risk, skewed fat-tail distributions, extreme stock returns, tail risk.

JEL Classification: G10, G11, C13, E32, E37

Suggested Citation

Bali, Turan G. and Demirtas, K. Ozgur and Levy, Haim, Is There an Intertemporal Relation between Downside Risk and Expected Returns? (July 15, 2009). Journal of Financial and Quantitative Analysis (JFQA), Vol. 44, No. 4, pp. 883-909, 2009, Available at SSRN: https://ssrn.com/abstract=1434366

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

K. Ozgur Demirtas (Contact Author)

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~mshlevy/

Fordham University ( email )

140 West 62nd Street
New York, NY 10023
United States

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