Is systematic downside beta risk really priced? Evidence in emerging market data
Don U.A. Galagedera and Robert D. Brooks
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 regression analysis fail
to support pricing models with downside risk measures. In a cross-sectional
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.
