Sorting Out Downside Beta

28 Pages Posted: 6 Jan 2012 Last revised: 10 Oct 2012

Thierry Post

Koc University - Graduate School of Business

Pim van Vliet

Robeco Asset Management - Quantitative Strategies

Simon Lansdorp

Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

Keywords: Asset pricing, downside beta, CAPM, downside risk, semi-variance

JEL Classification: C22, C32, G11, G12

Suggested Citation

Post, Thierry and van Vliet, Pim and Lansdorp, Simon, Sorting Out Downside Beta (October 10, 2012). Available at SSRN: https://ssrn.com/abstract=1980614 or http://dx.doi.org/10.2139/ssrn.1980614

Thierry Post

Koc University - Graduate School of Business ( email )

Rumelifeneri Yolu
34450 Sariyer
Istanbul
Turkey

Pim Van Vliet

Robeco Asset Management - Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

Simon Lansdorp (Contact Author)

Robeco Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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