Market-Beta and Downside Risk

50 Pages Posted: 18 Jul 2017 Last revised: 25 Oct 2018

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

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

Yaron Levi

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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