Symmetric and Asymmetric Market Betas and Downside Risk

Abstract

Our paper explores whether a symmetric plain or an asymmetric down-beta is a better hedging measure ( Roy 1952 ; Markowitz 1959 ). Unlike Ang, Chen, and Xing (2006) and Lettau, Maggiori, and Weber (2014) , we find that the prevailing plain market beta is the better predictor, even for crashes. It also predicts the subsequent down-beta (i.e., beta measured only on days when the stock market had declined) better than down-beta itself. Stocks with higher down-betas ex ante also do not earn higher average rates of return ex post. Thus, down-betas are useful for neither hedging nor risk-pricing purposes.