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The Relationship between Asymmetric Downside Beta and Stock Returns : Evidence from the Korean Stock Market

  • Seung Hyun Jeong SK Securities.Co.,LTD
  • Hoon Cho Korea Advanced Institute of Science and Technology (KAIST)
  • Jihun Kim Yonsei University
  • Dohyun Chun Korea Advanced Institute of Science and Technology (KAIST)
Levi and Welch (2020) argue that market beta and asymmetric downside beta are highly correlated and that most of downside beta's explanatory power stems from market beta. This study re-examines the relationship between stock returns and downside beta in the Korean stock market. We test beta spreads including beta asymmetry (i.e., down beta - up beta spread) and relative downside beta (i.e., down beta - market beta spread) to control for the market beta. We find negative correlations between downside betas and stock returns even after controlling for market beta and firm characteristics. We also find that regardless of market conditions (i.e., bear, neutral, and bull markets) high beta spreads are associated with low returns. Accordingly, zero-cost portfolios that purchase the stocks in the low quintile of beta spreads and sells the stocks in the top quintile generate significantly positive alphas. These findings underline that downside beta contains the unique information beyond market beta in the Korean stock market.

  • Seung Hyun Jeong
  • Hoon Cho
  • Jihun Kim
  • Dohyun Chun
Levi and Welch (2020) argue that market beta and asymmetric downside beta are highly correlated and that most of downside beta's explanatory power stems from market beta. This study re-examines the relationship between stock returns and downside beta in the Korean stock market. We test beta spreads including beta asymmetry (i.e., down beta - up beta spread) and relative downside beta (i.e., down beta - market beta spread) to control for the market beta. We find negative correlations between downside betas and stock returns even after controlling for market beta and firm characteristics. We also find that regardless of market conditions (i.e., bear, neutral, and bull markets) high beta spreads are associated with low returns. Accordingly, zero-cost portfolios that purchase the stocks in the low quintile of beta spreads and sells the stocks in the top quintile generate significantly positive alphas. These findings underline that downside beta contains the unique information beyond market beta in the Korean stock market.
Asymmetric beta,Downside risk,CAPM,Low beta anomaly,Portfolio return