Downside Risk And Empirical Asset Pricing

Currently, the Nobel prize winning Capital Asset Pricing Model (CAPM)

celebrates its 40th birthday. Although widely applied in financial

management, this model does not fully capture the empirical riskreturn

relation of stocks; witness the beta, size, value and momentum

effects. These problems may be caused by the use of variance as

the relevant risk measure. This study analyzes if asset pricing models

that use alternative risk measures better describe the empirical riskreturn

trade-off. The results suggest that downside risk helps to

better understand the cross-section of stock returns, especially during

economic recessions.