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Rewards for downside risk in Asian markets

Lakshman Alles and Louis Murray

Journal of Banking & Finance, 2013, vol. 37, issue 7, 2501-2509

Abstract: Distributional properties of emerging market returns may impact on investor ability and willingness to diversify. Investors may also place greater weighting on downside losses, compared to upside gains. Using individual equities in a range of emerging Asian markets, we investigate the potential contribution of downside risk measures to explain asset pricing in these markets. As realized returns are used as a proxy for expected returns, we separately examine conditional returns in upturn and downturn periods, in order to successfully identify risk and return relationships. Results indicate that co-skewness and downside beta are priced by investors. Further testing confirms a separate premium for each measure, confirming that they capture different aspects of downside risk. Robustness tests indicate that, when combined with other risk measures, both retain their explanatory power. Tests also indicate that co-skewness may be the more robust measure.

Keywords: Downside risk; Emerging markets; Risk exposure and returns (search for similar items in EconPapers)
JEL-codes: G12 G15 O16 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2501-2509