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Recent research shows that distortions of distributional properties of emerging markets returns may impact the effectiveness of conventional asset pricing models. Last years a mean-semivariance framework has been proposed as an alternative approach to portfolio analysis since different investors assign a lower weight to positive deviations from the mean than to negative ones. Using individual equities from Brazilian market we separately examine conditional returns in upturn and downturn periods.
In this paper we aim to test if investors of Brazilian market are rewarded for exposure to both co-skewness and downside beta. To date existing asset pricing literature points out the convenience of using these both downside risk measures in which investors are compensated for holding, in a semi–variance environment, systematic and co-skewness risk, therefore we examine the linkage between the risk/reward relationships between these two measures and others systematic measures of risk.
A notable contribution within the issue of downside risk in emerging markets came from Estrada (2000). Estrada (2000) and later Pereiro (2006), suggested to use the downside beta. If stock prices exhibit non normality properties, then the importance of skewness cannot be overlooked. Kraus & Litzenberger (1976) extend the CAPM to incorporate the effect of skewness in asset pricing. Assets that increase a portfolio’s skewness should have lower expected returns (Harvey & Siddique, 2000).
The research will be based on daytime data of exchange auctions of financial assets that compound around the 85% of the capitalization of the Brazilian market index Ibovespa. Our research proposal is to test both the viability and strength of Coskewness and Downside Beta when estimating expected returns for Brazilian Market Stocks.With all the data we form two sub-samples, one containing company returns during one semester periods of downturn and one for those semesters of upturns
During downturns, t-test indicates significant differences for returns and co-skewness between highest and lowest co-skewness ranked portfolios and there exist a positive monotonic relationship. This result confirms that losses may be probable from negative (lower) co-skewness during downturns
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