Conditional Downside Risk and the CAPM

Thierry Post and Pim Vliet

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

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: CAPM; Downside risk; asymmetry; conditional downside risk; lower partial moments; non-linear kernel; semi-variance (search for similar items in EconPapers)
JEL-codes: C22 C32 G11 G12 G3 M (search for similar items in EconPapers)
Date: 2004-07-28
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Citations: View citations in EconPapers (15)

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