Downside Risk Beta
factor.formula
Downside Risk Beta:
in:
- :
The series of monthly returns of stock $i$ over the past $K$ months, where each monthly return is calculated from the daily returns in that month.
- :
A series of monthly returns of a market index (e.g. CSI 300 or S&P 500) over the past $K$ months, where each monthly return is calculated from the daily returns of that month. Here, $r_m$ should use the same frequency as $r_i$.
- :
The average of the daily returns of the market index over the past $K$ months. Daily data should be used for calculation instead of monthly data. $\mu_m$ represents the average return level of the market during this period and is used to distinguish whether the market return is rising or falling.
- :
The lookback window is usually set to 12 months to provide enough data points for reliable statistical calculations. To ensure the stability of the calculation, it is recommended to include at least 50 daily yield data points to meet the requirements of statistical significance.
factor.explanation
Downside risk beta focuses on the linkage between stock returns and market returns during market declines by eliminating trading days with higher-than-average market returns. It can more accurately measure the systematic risk of individual stocks in a market downturn and provide investors with a more effective risk management tool. The downside risk premium reflected by this factor cannot be captured by traditional beta and is particularly important in risk-sensitive investment strategies.