Is Systematic Downside Beta Risk Really Priced? Evidence in Emerging Market Data

Don (Tissa) U. A. Galagedera, Robert Darren Brooks
2005 Social Science Research Network  
Several studies advocating safety first as a major concern to investors propose downside beta risk as an alternative to the traditional systematic risk-beta. Downside measures are concerned with a subset of the data and therefore the results in the studies that consider the downside beta only may be biased. This study addresses this issue by including downside co-skewness risk in addition to the downside beta risk in the pricing model. In a sample of 27 emerging markets two-stage rolling
more » ... ion analysis fail to support pricing models with downside risk measures. In a crosssectional analysis inclusion of downside co-skewness improves model fit. When considered together, downside beta is potential and downside co-skewness is a risk to the rational investor. Even though our results are inconclusive the evidence strongly suggests a need for further investigation of co-skewness risk in pricing models that adopt a downside risk framework. JEL Codes: G12, G15
doi:10.2139/ssrn.790106 fatcat:na7akqnocvhebijkddv2j4ryoy