The Downside Risk and Equity Evaluation: Emerging Market Evidence

In this paper we employ several risk measures to evaluate the equity returns in emerging markets. We focus on a downside risk approach, in particular, with shortfall probability, expected shortfall, downside variance and downside deviation. Our results show that return variance is important in explaining the same-period return. When the risk measure is used to predict future risk premium, the relative-to-zero downside variance (deviation) is a better measure than the total variance (deviation). This new risk measure is not only aligned with people's normal risk sense, but also consistent with the available information in portfolio management.