Downside Risk And Empirical Asset Pricing
Abstract
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.