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Examining significance of “downside beta” as a measure of risk – evidence from Indian equity market

Sivakumar Menon (XLRI Xavier School of Management, Jamshedpur, India)
Pitabas Mohanty (Department of Finance, XLRI Xavier School of Management, Jamshedpur, India)
Uday Damodaran (Indian Institute of Management Udaipur, Udaipur, India)
Divya Aggarwal (Research Center, Léonard de Vinci Pôle Universitaire, Paris, France)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 12 May 2023

192

Abstract

Purpose

Many studies have shown that from a theoretical and empirical point of view, downside risk-based measures of risk are better than the traditional ones. Despite academic appeal and practical implications, downside risk has not been thoroughly examined in markets outside developed country markets. Using downside beta as a measure of downside risk, this study examines the relationship between downside beta and stock returns in Indian equity market, an emerging market with unique investor, asset and market characteristics.

Design/methodology/approach

This is an empirical study done by using ranked portfolio return analysis and regression analysis methodologies.

Findings

The study results show that downside risk, as measured by downside beta, is distinctly priced in the Indian equity market. There is a direct positive relationship between downside beta and contemporaneous realized returns, indicating a premium for downside risk. Downside risk carries a higher weightage than upside potential in the aggregate return of the stock portfolios. Downside beta is a better measure of systematic risk than conventional market beta and downside coskewness.

Practical implications

The empirical results support the adoption of downside beta in practice and provide a case for replacing traditional beta with downside beta in asset pricing applications, trading and investment strategies, and capital allocation decision-making.

Originality/value

This is one of the first in-depth studies examining downside beta in Indian equity markets using a broad sample of individual stock returns covering a wide time range of 22 years. To the best of our knowledge, this study is the first one to compare downside beta and downside coskewness using individual stock data from the Indian equity market.

Keywords

Acknowledgements

The authors gratefully acknowledge the valuable suggestions and feedback by Prof. Pradhan, H.K., XLRI Xavier School of Management, Jamshedpur, India on the draft paper.

Citation

Menon, S., Mohanty, P., Damodaran, U. and Aggarwal, D. (2023), "Examining significance of “downside beta” as a measure of risk – evidence from Indian equity market", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-01-2021-0026

Publisher

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Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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