Realized Semibetas: Signs of Things to Come

Abstract

We propose a new decomposition of the traditional market beta into four semibetas depending on the signed covariation between the market and individual asset returns. Consistent with the pricing implications from a mean-semivariance framework, we show that higher semibetas defined by negative market and negative (positive) asset return covariation predict significantly higher (lower) future returns, while the other two semibetas do not appear to be priced. The results are robust to an array of alternative test specifications and additional controls. Rather than betting on or against beta, we conclude that it is better to bet on and against the "right" semibetas.

Keywords: Cross-sectional return variation; downside risk; semicovariances; semibetas

JEL Classification: G11, G12, C58