Mean-semivariance behavior: Downside risk and capital asset pricing |
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| Institution: | 1. University of Gothenburg, Vasagatan 1, Gothenburg 40530, Sweden;2. ESSEC Business School Paris-Singapore, 3 Avenue Bernard Hirsch, CS 50105 CERGY, 95021 Cergy-Pontoise Cedex, France;1. D-Fine. The main share of Matthias Held’s work on this paper was done during his time as a PhD student at WHU - Otto Beisheim School of Management Germany;2. Goethe University Frankfurt, House of Finance, Theodor-W.-Adorno-Platz 3, Frankfurt 60323, Germany;3. Bank of America Merrill Lynch The main share of Marcel Omachel’s work on this paper was done during his time as a PhD student at WHU - Otto Beisheim School of Management Germany;4. Karlsruhe Institute of Technology, Blücherstraße 17, Karlsruhe 76185, Germany;1. Revenue & Customs, Deputy Directorate-General for Tax Collection, Lisbon, Portugal;2. CeBER – Center for Business and Economics Research, University of Coimbra, Portugal;3. INESC, Coimbra, Portugal;4. Faculty of Economics, University of Coimbra, Coimbra, Portugal |
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| Abstract: | For over 30 years academics and practitioners have been debating the merits of the CAPM. One of the characteristics of this model is that it measures risk by beta, which follows from an equilibrium in which investors display mean-variance behavior. In that framework, risk is assessed by the variance of returns, a questionable and restrictive measure of risk. The semivariance of returns is a more plausible measure of risk and can be used to generate an alternative behavioral hypothesis, mean-semivariance behavior; an alternative measure of risk for diversified investors, the downside beta; and an alternative pricing model based on this downside beta. The empirical evidence discussed in this article for the entire MSCI database of developed and emerging markets clearly supports the downside beta and the pricing model based on it over beta and the CAPM. |
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