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The Downside Risk and Equity Evaluation: Emerging Market Evidence

Author

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  • Jianguo Chen

    (Department of finance, Bankingand Property, College of Business, Massey University, Palmerston North, New Zealand)

  • Dar-Hsin Chen

    (Department of Banking and Finance, Tamkang University, Tamsui, Taiwan)

Abstract

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.

Suggested Citation

  • Jianguo Chen & Dar-Hsin Chen, 2004. "The Downside Risk and Equity Evaluation: Emerging Market Evidence," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(1), pages 77-93, January.
    • Handle: RePEc:sae:emffin:v:3:y:2004:i:1:p:77-93
    DOI: 10.1177/097265270400300105
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    References listed on IDEAS

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    1. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
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    3. Roll, Richard & Ross, Stephen A, 1994. "On the Cross-sectional Relation between Expected Returns and Betas," Journal of Finance, American Finance Association, vol. 49(1), pages 101-121, March.
    4. Bekaert, Geert & Harvey, Campbell R, 1995. "Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    5. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    6. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
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    Cited by:

    1. Dar-Hsin Chen & Chun-Da Chen & Jianguo Chen, 2009. "Downside risk measures and equity returns in the NYSE," Applied Economics, Taylor & Francis Journals, vol. 41(8), pages 1055-1070.
    2. Shafaai, Shafizal & Masih, Mansur, 2013. "Determinants of cost of equity: The case of Shariah-compliant Malaysian firms," MPRA Paper 62364, University Library of Munich, Germany.

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