Rewards for downside risk in Asian markets

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.

Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

“…Many studies on developed and emerging markets showed that downside measures better explain variability in the cross-section of returns than conventional ones (Estrada, 2002(Estrada, , 2007Post & van Vliet, 2006). The studies using individual securities also demonstrate that downside risk measures better explain securities returns than the beta coefficient (Alles & Murray, 2013;Pedersen & Hwang, 2007). Ang, Chen, & Xing (2006), based on companies listed on the NYSE, AMEX and NASDAQ, showed that investors are rewarded with a market premium for the downside risk, which means that the assets with higher downside beta coefficients reach higher rates of return on average.…”

Is stock return predictability of option‐implied skewness affected by the market state?

“…The regressions are estimated each month over the time period July 1996 through August 2014. 17 Pettengill et al (1995), Ang, Chen, and Xing (2006), and Alles and Murray (2013) show that risk premium is affected by market return. They define the sample upturn and downturn markets and report different predictability of betas among these samples.…”

The Relationships Between Systematic Measures of Risk of Capital Investments in the Classical and Downside Framework

“…Porównania wyceny aktywów za pomocą klasycznych i dolnostronnych współczynników beta dokonywano na wielu rozwiniętych i rozwijających się rynkach kapitałowych. Badania przy użyciu szeregów indywidualnych stóp zwrotu na europejskich oraz azjatyckich giełdach pokazały, że ryzyko dolnostronne wyjaśnia poziom stóp zwrotu u większej części walorów niż klasyczne miary ryzyka (Pedersen, Hwang, 2007;Artavanis, Diacogiannis, Mylonakis, 2010;Alles, Murray, 2013;Markowski, 2013).…”