Conditional Downside Risk and the CAPM

34 Pages Posted: 26 Aug 2006

See all articles by Thierry Post

Thierry Post

Graduate School of Business of Nazarbayev University

Pim van Vliet

Robeco Asset Management - Quantitative Investing

Date Written: 28 2004 7,

Abstract

The mean-semivariance CAPM strongly outperforms the traditional mean-variance CAPM in terms of its ability to explain the cross-section of US stock returns. If regular beta is replaced by downside beta, the traditional risk-return relationship is restored. The downside betas of low-beta stocks are substantially higher than the regular betas, while high-beta stocks involve less systematic downside risk than suggested by their regular betas. This pattern is especially pronounced during bad states-of-the-world, when the market risk premium is high. In sum, our results provide evidence in favor of market portfolio efficiency, provided we account for conditional downside risk.

Keywords: Downside risk, conditional downside risk, CAPM, non-linear kernel, asymmetry, semi-variance, lower partial moments

JEL Classification: M, G3, C22, C32, G11, G12

Suggested Citation

Post, Thierry and van Vliet, Pim, Conditional Downside Risk and the CAPM (28 2004 7,). ERIM Report Series Reference No. ERS-2004-048-F&A. Available at SSRN: https://ssrn.com/abstract=797286

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Pim Van Vliet

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3011 AG
Netherlands

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