A Novel Downside Risk Measure and Expected Returns
Several studies have found that the cross-section of stock returns reflects a risk premium for bearing downside risk; however, existing measures of downside risk have poor power for predicting returns. Therefore, this paper proposes a novel measure...
| Main Author: | |
|---|---|
| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/524291563990594233/A-Novel-Downside-Risk-Measure-and-Expected-Returns http://hdl.handle.net/10986/32131 |
| id |
okr-10986-32131 |
|---|---|
| recordtype |
oai_dc |
| spelling |
okr-10986-321312022-09-19T12:16:38Z A Novel Downside Risk Measure and Expected Returns Liu, Jinjing RISK PREMIUM ASSET RETURN RETURN ON ASSET EXPECTED RETURN STOCK MARKETS Several studies have found that the cross-section of stock returns reflects a risk premium for bearing downside risk; however, existing measures of downside risk have poor power for predicting returns. Therefore, this paper proposes a novel measure of downside risk, the ES-implied beta, to improve the prediction of the cross-section of asset returns. The ES-implied beta explains stock returns over the same period as well as the widely used downside beta, but also has strong predictive power over future returns. In the empirical analysis, although the widely used downside beta shows a weak relation with future expected returns, the ES-implied beta implies a statistically and economically significant risk premium of 0.5 percent per month. The predictive power of the ES-implied beta is not explained by the cross-sectional effects from the CAPM beta, size, book-to-market ratio, momentum, coskewness, cokurtosis or liquidity beta, nor does it depend on the design of the empirical analysis. 2019-07-29T18:59:15Z 2019-07-29T18:59:15Z 2019-07 Working Paper http://documents.worldbank.org/curated/en/524291563990594233/A-Novel-Downside-Risk-Measure-and-Expected-Returns http://hdl.handle.net/10986/32131 English Policy Research Working Paper;No. 8947 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
RISK PREMIUM ASSET RETURN RETURN ON ASSET EXPECTED RETURN STOCK MARKETS |
| spellingShingle |
RISK PREMIUM ASSET RETURN RETURN ON ASSET EXPECTED RETURN STOCK MARKETS Liu, Jinjing A Novel Downside Risk Measure and Expected Returns |
| relation |
Policy Research Working Paper;No. 8947 |
| description |
Several studies have found that the
cross-section of stock returns reflects a risk premium for
bearing downside risk; however, existing measures of
downside risk have poor power for predicting returns.
Therefore, this paper proposes a novel measure of downside
risk, the ES-implied beta, to improve the prediction of the
cross-section of asset returns. The ES-implied beta explains
stock returns over the same period as well as the widely
used downside beta, but also has strong predictive power
over future returns. In the empirical analysis, although the
widely used downside beta shows a weak relation with future
expected returns, the ES-implied beta implies a
statistically and economically significant risk premium of
0.5 percent per month. The predictive power of the
ES-implied beta is not explained by the cross-sectional
effects from the CAPM beta, size, book-to-market ratio,
momentum, coskewness, cokurtosis or liquidity beta, nor does
it depend on the design of the empirical analysis. |
| format |
Working Paper |
| author |
Liu, Jinjing |
| author_facet |
Liu, Jinjing |
| author_sort |
Liu, Jinjing |
| title |
A Novel Downside Risk Measure and Expected Returns |
| title_short |
A Novel Downside Risk Measure and Expected Returns |
| title_full |
A Novel Downside Risk Measure and Expected Returns |
| title_fullStr |
A Novel Downside Risk Measure and Expected Returns |
| title_full_unstemmed |
A Novel Downside Risk Measure and Expected Returns |
| title_sort |
novel downside risk measure and expected returns |
| publisher |
World Bank, Washington, DC |
| publishDate |
2019 |
| url |
http://documents.worldbank.org/curated/en/524291563990594233/A-Novel-Downside-Risk-Measure-and-Expected-Returns http://hdl.handle.net/10986/32131 |
| _version_ |
1764475882192240640 |