Empirical Tests of the Mean-Semivariance CAPM
32 Pages Posted: 21 Jun 2004
Date Written: June 2005
The mean-semivariance CAPM better explains the cross-section of US stock returns than the traditional mean-variance CAPM does. If regular beta is replaced by downside beta, the cross-sectional risk-return relationship improves considerably. Especially during bad-states of the world, when the equity premium is high, we find a near-perfect relation between risk and return. The explanatory power of conditional downside risk remains after controlling for the known size, value and momentum effects.
Keywords: Asset pricing, downside risk, conditional tests, CAPM, non-linear kernels, asymmetry, semi-variance, lower partial moments
JEL Classification: C22, C32, G11, G12
Suggested Citation: Suggested Citation