Is there an intertemporal relation between downside risk and expected returns?

Turan G. Bali, K. Ozgur Demirtas, Haim Levy

Research output: Contribution to journalArticlepeer-review

188 Scopus citations

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).

Original languageEnglish
Pages (from-to)883-909
Number of pages27
JournalJournal of Financial and Quantitative Analysis
Volume44
Issue number4
DOIs
StatePublished - Aug 2009

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