Downside Risk in Emerging Markets
34 Pages Posted: 16 Jan 2012 Last revised: 28 Jul 2015
Date Written: January 16, 2012
Abstract
This paper investigates the relation between downside risk and expected returns on the aggregate stock market in an international context. Nonparametric and parametric Value at Risk (VaR) are used as measures of downside risk to determine the existence of a risk-return tradeoff. For emerging markets, fixed-effects panel data regressions provide evidence for a significantly positive relationship between monthly expected market returns and downside risk. This result is robust after controlling for aggregate dividend yield and price-to-fundamental ratios. The relationship between expected returns and downside risk is weaker for developed markets and vanishes when control variables are included in the specification.
Keywords: downside risk, value at risk, risk-return tradeoff, emerging markets
JEL Classification: G12, G15
Suggested Citation: Suggested Citation
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