Asymmetric Beta Comovement and Systematic Downside Risk

50 Pages Posted: 19 Oct 2014

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Qunzi Zhang

Shandong University

Date Written: October 1, 2014

Abstract

In this paper, we document evidence that downside betas tend to comove more than upside betas during a financial crisis, but upside betas tend to comove more than the downside betas during financial booms. We find that the asymmetry between Downside-Beta Comovement and Upside-Beta Comovement is the main driving force for market level skewness. An indicator called "Systematic Downside Risk" (SDR) is defined to characterize this asymmetry in the comovement of betas. This indicator negatively predicts future market returns. The SDR effectively forecasts future monthly stock market movements with an out-of-sample R-square above 2.27% relative to a strategy based on historical mean. An investor who timed the market using SDR would have obtained a Sharpe ratio gain of 0.206.

Keywords: Systematic Risk, Skewness, Predictability, Trading Strategies

JEL Classification: G11, G12, G14, G17

Suggested Citation

Jondeau, Eric and Zhang, Qunzi, Asymmetric Beta Comovement and Systematic Downside Risk (October 1, 2014). Swiss Finance Institute Research Paper No. 14-59. Available at SSRN: https://ssrn.com/abstract=2511327 or http://dx.doi.org/10.2139/ssrn.2511327

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Qunzi Zhang (Contact Author)

Shandong University ( email )

27 Shanda Nanlu
South Rd.
Jinan, Shandong 250100
China

HOME PAGE: http://www.econ.sdu.edu.cn/tree/content.php?id=52869

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