In investing, downside beta is the beta that measures a stock's association with the overall stock market (risk) only on days when the market’s return is negative. Downside beta was first proposed by Roy 1952[1] and then popularized in an investment book by Markowitz (1959).
It is common to measure and as the excess returns to security and the market , as the average market excess return, and Cov and Var as the covariance and variance operators, Downside beta is
while upside beta is given by this expression with the direction of the inequalities reversed. Therefore, can be estimated with a regression of the excess return of security on the excess return of the market, conditional on (excess) market return being negative.
Downside beta vs. betaedit
Downside beta was once hypothesized to have greater explanatory power than standard beta in bearish markets.[2][3] As such, it would have been a better measure of risk than ordinary beta.
^Roy, A. D. (1952). "Safety First and the Holding of Assets". Econometrica. 20 (3): 431–449. doi:10.2307/1907413. ISSN 0012-9682. JSTOR 1907413.
^Ang, Andrew; Chen, Joseph; Xing, Yuhang (2006-12-01). "Downside Risk". The Review of Financial Studies. 19 (4): 1191–1239. doi:10.1093/rfs/hhj035. ISSN 0893-9454.
^Lettau, Martin; Maggiori, Matteo; Weber, Michael (2014-11-01). "Conditional risk premia in currency markets and other asset classes". Journal of Financial Economics. 114 (2): 197–225. doi:10.1016/j.jfineco.2014.07.001. ISSN 0304-405X.
^Bawa, V.; Lindenberg, E. (1977). "Capital market equilibrium in a mean-lower partial moment framework". Journal of Financial Economics. 5 (2): 189–200. doi:10.1016/0304-405x(77)90017-4.
^Hogan, W.W.; Warren, J.M. (1977). "Toward the development of an equilibrium capital-market model based on semi-variance". Journal of Financial and Quantitative Analysis. 9 (1): 1–11. doi:10.2307/2329964. JSTOR 2329964. S2CID 153337865.
External linksedit
An Investigation of Beta and Downside Beta Based CAPM - Case Study of Karachi Stock Exchange, SSRN. M. Tahir, Q. Abbas, S.M. Sargana, U. Ayub and S.K. Saeed; February 2013
Estrada (2007). "Mean-semivariance behavior: Downside risk and capital asset pricing". International Review of Economics and Finance. 16 (2): 169. doi:10.1016/j.iref.2005.03.003.
January 01, 1970
downside, beta, investing, downside, beta, beta, that, measures, stock, association, with, overall, stock, market, risk, only, days, when, market, return, negative, first, proposed, 1952, then, popularized, investment, book, markowitz, 1959, contents, formula,. In investing downside beta is the beta that measures a stock s association with the overall stock market risk only on days when the market s return is negative Downside beta was first proposed by Roy 1952 1 and then popularized in an investment book by Markowitz 1959 Contents 1 Formula 2 Downside beta vs beta 3 Use in Equilibrium Models of Risk Reward 4 References 5 External linksFormula editIt is common to measure r i displaystyle r i nbsp and r m displaystyle r m nbsp as the excess returns to security i displaystyle i nbsp and the market m displaystyle m nbsp u m displaystyle u m nbsp as the average market excess return and Cov and Var as the covariance and variance operators Downside beta is b Cov r i r m r m lt u m Var r m r m lt u m displaystyle beta frac operatorname Cov r i r m mid r m lt u m operatorname Var r m mid r m lt u m nbsp while upside beta is given by this expression with the direction of the inequalities reversed Therefore b displaystyle beta nbsp can be estimated with a regression of the excess return of security i displaystyle i nbsp on the excess return of the market conditional on excess market return being negative Downside beta vs beta editDownside beta was once hypothesized to have greater explanatory power than standard beta in bearish markets 2 3 As such it would have been a better measure of risk than ordinary beta Use in Equilibrium Models of Risk Reward editThe Capital asset pricing model CAPM can be modified to work with dual betas 4 Other researchers have attempted to use semi variance instead of standard deviation to measure risk 5 References edit Roy A D 1952 Safety First and the Holding of Assets Econometrica 20 3 431 449 doi 10 2307 1907413 ISSN 0012 9682 JSTOR 1907413 Ang Andrew Chen Joseph Xing Yuhang 2006 12 01 Downside Risk The Review of Financial Studies 19 4 1191 1239 doi 10 1093 rfs hhj035 ISSN 0893 9454 Lettau Martin Maggiori Matteo Weber Michael 2014 11 01 Conditional risk premia in currency markets and other asset classes Journal of Financial Economics 114 2 197 225 doi 10 1016 j jfineco 2014 07 001 ISSN 0304 405X Bawa V Lindenberg E 1977 Capital market equilibrium in a mean lower partial moment framework Journal of Financial Economics 5 2 189 200 doi 10 1016 0304 405x 77 90017 4 Hogan W W Warren J M 1977 Toward the development of an equilibrium capital market model based on semi variance Journal of Financial and Quantitative Analysis 9 1 1 11 doi 10 2307 2329964 JSTOR 2329964 S2CID 153337865 External links editAn Investigation of Beta and Downside Beta Based CAPM Case Study of Karachi Stock Exchange SSRN M Tahir Q Abbas S M Sargana U Ayub and S K Saeed February 2013 Estrada 2007 Mean semivariance behavior Downside risk and capital asset pricing International Review of Economics and Finance 16 2 169 doi 10 1016 j iref 2005 03 003 Retrieved from https en wikipedia org w index php title Downside beta amp oldid 1135751316, wikipedia, wiki, book, books, library,
