Downside risk measures and equity returns in the NYSE

Abstract

Although investors are concerned foremost with mean and variance, they are also sensitive to downside risk. In this article we employ several risk variables of traditional and downside risk measures to evaluate the equity returns in the New York Stock Exchange (NYSE) market in order to test their explaining power. The test results show that variance (or SD) is better than beta in the performance. However, those traditional risk measures have almost less explanatory power than total downside risk measures, whether the downside risk measures are relative to zero, the mean return or the market index return when they are used to predict the future risk premium. The results also show that the significance of the downside risk measures in the NYSE market is different between different industry sectors, different periods of time and in different individual equities.

Notes

¹ Homaifar and Graddy (1991) also corroborated the hypothesis that empirical estimates of the lower partial moment (LPM) beta tend to overestimate the true systematic risk.

² SFP and ESF are proposed by Balzer (1994), and DNV and DND are proposed by Markowitz (1959).

³ (http://biz.yahoo.com/ic/ind_index.html).