Market-Beta and Downside Risk
50 Pages Posted: 18 Jul 2017 Last revised: 14 May 2020
Date Written: October 22, 2018
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