Realized semibetas: Disentangling “good” and “bad” downside risks

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2021-01-01

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Abstract

We propose a new decomposition of the traditional market beta into four semibetas that depend on the signed covariation between the market and individual asset returns. We show that semibetas stemming from negative market and negative asset return covariation predict significantly higher future returns, while semibetas attributable to negative market and positive asset return covariation predict significantly lower future returns. The two semibetas associated with positive market return variation do not appear to be priced. The results are consistent with the pricing implications from a mean-semivariance framework combined with arbitrage risk driving a wedge between the risk premiums for long and short positions. We conclude that rather than betting against the traditional market beta, it is better to bet on and against the “right” semibetas.

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Published Version (Please cite this version)

10.1016/j.jfineco.2021.05.056

Publication Info

Bollerslev, T, AJ Patton and R Quaedvlieg (2021). Realized semibetas: Disentangling “good” and “bad” downside risks. Journal of Financial Economics. 10.1016/j.jfineco.2021.05.056 Retrieved from https://hdl.handle.net/10161/24063.

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Patton

Andrew J. Patton

Zelter Family Distinguished Professor

Patton’s research interests lie in financial econometrics, with an emphasis on forecasting volatility and dependence, forecast evaluation methods, high frequency financial data, and the analysis of hedge funds and mutual funds. His research has appeared in a variety of academic journals, including the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Econometrica, Journal of Econometrics, and the Journal of the American Statistical Association. He has given hundreds of invited seminars around the world, at universities, central banks, and other institutions. A complete list of his current and past research is available at: http://econ.duke.edu/~ap172/research.html


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