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Returns on negative beta securities: implications for the empirical SML

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  • Dale Cloninger
  • Edward Waller
  • Yvette Bendeck
  • Lee Revere

Abstract

Traditional textbook analysis either presumes or graphically depicts a monotonically positively sloped security market line (SML). Tests to empirically derive the SML also presume such a function. This paper argues that over the range of negative betas the SML is not positively sloped but negatively sloped. The SML over both negative and positive ranges, therefore, forms a 'V' shaped function with the point of the 'V' at a beta of zero and a return equal to the risk-free rate. Empirical tests confirm a negative sloped SML over the range of negative betas. The tests also indicate that the returns of negative beta securities equal or exceed those for their positive beta counterparts. Traditional theory suggests the returns of negative beta securities are less than the risk-free rate. The preliminary empirical analysis indicates otherwise.

Suggested Citation

  • Dale Cloninger & Edward Waller & Yvette Bendeck & Lee Revere, 2004. "Returns on negative beta securities: implications for the empirical SML," Applied Financial Economics, Taylor & Francis Journals, vol. 14(6), pages 397-402.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:6:p:397-402
    DOI: 10.1080/09603100410001673621
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    References listed on IDEAS

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    1. 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.
    2. Blume, Marshall E & Friend, Irwin, 1973. "A New Look at the Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 28(1), pages 19-33, March.
    3. Friend, Irwin & Blume, Marshall E, 1970. "Measurement of Portfolio Performance Under Uncertainty," American Economic Review, American Economic Association, vol. 60(4), pages 561-575, September.
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    1. For Those Who Care
      by stefankarlsson in Stefan Karlsson's Blog on 2007-03-02 01:24:00

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    Cited by:

    1. Wolski Rafał, 2009. "The Influence of Negative Beta Assets on the Empirical SML in the Polish Capital Market," Folia Oeconomica Stetinensia, Sciendo, vol. 8(1), pages 140-153, January.
    2. Madhusmita Bhadra & Doyeon Kim, 2023. "Income elasticity of demand and stock market beta," International Finance, Wiley Blackwell, vol. 26(2), pages 225-240, August.

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