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Modified Beta and Cross-Sectional Stock Returns

Growing Presence of Real Options in Global Financial Markets

ISBN: 978-1-78714-838-3, eISBN: 978-1-78714-837-6

Publication date: 27 November 2017

Abstract

Previous studies have shown that stock returns bear a premium for downside risk versus upside potential. We develop a new risk measure which scales the traditional CAPM beta by the ratio of the upside beta to the downside beta, thereby incorporating the effects of both upside potential and downside risk. This “modified” beta has substantial explanatory power in standard asset pricing tests, outperforming existing measures, and it is robust to various alternative modeling and estimation techniques.

Keywords

Citation

Dennis, S.A., Simlai, P. and Smith, W.S. (2017), "Modified Beta and Cross-Sectional Stock Returns", Growing Presence of Real Options in Global Financial Markets (Research in Finance, Vol. 33), Emerald Publishing Limited, Leeds, pp. 75-104. https://doi.org/10.1108/S0196-382120170000033005

Publisher

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Emerald Publishing Limited

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