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Is There an Intertemporal Relation between Downside Risk and Expected Returns?

Published online by Cambridge University Press:  01 August 2009

Turan G. Bali
Affiliation:
Zicklin School of Business, Baruch College, City University of New York, One Bernard Baruch Way, Box 10-225, New York, NY 10010. turan.bali@baruch.cuny.edu
K. Ozgur Demirtas
Affiliation:
Zicklin School of Business, Baruch College, City University of New York, One Bernard Baruch Way, Box 10-225, New York, NY 10010. ozgur.demirtas@baruch.cuny.edu
Haim Levy
Affiliation:
Jerusalem School of Business Administration, Hebrew University of Jerusalem, 91905, Israel. mshlevy@mscc.huji.ac.il

Abstract

This paper examines the intertemporal relation between downside risk and expected stock returns. Value at Risk (VaR), expected shortfall, and tail risk are used as measures of downside risk to determine the existence and significance of a risk-return tradeoff. We find a positive and significant relation between downside risk and the portfolio returns on NYSE/AMEX/Nasdaq stocks. VaR remains a superior measure of risk when compared with the traditional risk measures. These results are robust across different stock market indices, different measures of downside risk, loss probability levels, and after controlling for macroeconomic variables and volatility over different holding periods as originally proposed by Harrison and Zhang (1999).

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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