Relationship between Downside Risk and Return: New Evidence Through a Multiscaling Approach

27 Pages Posted: 19 Apr 2006

See all articles by Don U. A. Galagedera

Don U. A. Galagedera

Monash University - Department of Econometrics and Business Statistics

Elizabeth Ann Maharaj

Monash University

Robert D. Brooks

Monash University; Financial Research Network (FIRN)

Date Written: April 2006

Abstract

In the multiscaling approach a time series is decomposed into different time horizons referred to as timescales. In this paper we investigate the risk-return relationship in a downside framework using timescales. Two measures of downside risk; downside beta and downside co-skewness are investigated. A sample of Australian industry portfolios does not reveal a positive linear relationship between downside beta and portfolio return. At a high timescale where dynamics over a longer horizon (32-64 days) is captured a positive linear association between downside co-skewness and portfolio return is observed. Overall, our results suggest that when investigating the validity of asset pricing models whether in the downside framework or in the traditional mean-variance framework it may be prudent to consider other horizons in addition to the usual daily and monthly frequencies.

Keywords: wavelet multiscales, CAPM, downside beta, downside co-skewness

JEL Classification: G11, G12

Suggested Citation

Galagedera, Don (Tissa) U. A. and Maharaj, Elizabeth Ann and Brooks, Robert Darren, Relationship between Downside Risk and Return: New Evidence Through a Multiscaling Approach (April 2006). Available at SSRN: https://ssrn.com/abstract=896195 or http://dx.doi.org/10.2139/ssrn.896195

Don (Tissa) U. A. Galagedera (Contact Author)

Monash University - Department of Econometrics and Business Statistics ( email )

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Elizabeth Ann Maharaj

Monash University ( email )

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Australia

Robert Darren Brooks

Monash University ( email )

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Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

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Queensland
Australia