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2005•SSRN Electronic JournalOpen access

Relationship between Downside Beta and CAPM Beta

Don U. A. Galagedera

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Abstract

This paper establishes the relationship between the CAPM beta and three measures of downside beta assuming the market model and a downside version of the market model as data generating processes. For both processes the conditions under which the CAPM beta may numerically exactly/approximately equal the downside beta is discussed. An empirical example illustrates how the derived relationships between the betas may be useful in explaining differing conclusions in asset pricing studies.

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What this paper is about

This paper establishes the relationship between the CAPM beta and three measures of downside beta assuming the market model and a downside version of the market model as data generating processes. For both processes the conditions under which the CAPM beta may numerically exactly/approximately equal the downside beta is discussed. An empirical example illustrates how the derived relationships between the betas may be useful in explaining differing conclusions in asset pricing studies.

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Available abstract

This paper establishes the relationship between the CAPM beta and three measures of downside beta assuming the market model and a downside version of the market model as data generating processes. For both processes the conditions under which the CAPM beta may numerically exactly/approximately equal the downside beta is discussed. An empirical example illustrates how the derived relationships between the betas may be useful in explaining differing conclusions in asset pricing studies.

Key concepts: Capital asset pricing model, BETA (programming language), Downside risk, Economics, Financial economics, Econometrics, Computer science, Programming language

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