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Relationship between downside risk and return: new evidence through a multiscaling approach

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  • Don Galagedera
  • Elizabeth Maharaj
  • Robert Brooks

Abstract

In the multiscaling approach, a time series is decomposed into different time horizons referred to as timescales. In this article, we investigate the risk-return relationship in a downside framework using timescales. Two measures of downside risk; downside beta and downside co-skewness are investigated. A sample of Australian industry portfolios does not reveal a positive linear relationship between downside beta and portfolio return. At a high timescale where dynamics over a longer horizon (32-64 days) is captured, a positive linear association between downside co-skewness and portfolio return is observed. Overall, our results suggest that when investigating the validity of asset pricing models whether in the downside framework or in the traditional mean-variance framework, it may be prudent to consider other horizons in addition to the usual daily and monthly frequencies.

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  • Don Galagedera & Elizabeth Maharaj & Robert Brooks, 2008. "Relationship between downside risk and return: new evidence through a multiscaling approach," Applied Financial Economics, Taylor & Francis Journals, vol. 18(20), pages 1623-1633.
    • Handle: RePEc:taf:apfiec:v:18:y:2008:i:20:p:1623-1633
    DOI: 10.1080/09603100701720435
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    Cited by:

    1. Imran Umer Chhapra & Muhammad Kashif, 2019. "Higher Co-Moments and Downside Beta in Asset Pricing," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 15(1), pages 129-155.
    2. Suzanne G. M. Fifield & David G. McMillan & Fiona J. McMillan, 2020. "Is there a risk and return relation?," The European Journal of Finance, Taylor & Francis Journals, vol. 26(11), pages 1075-1101, July.

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