Introduction There has been a controversy in this journal about using downside risk measures in portfolio analysis. The downside risk measures supposedly are a major improvement over traditional portfolio theory. That is where the battle lines clashed when Rom and Ferguson (1993, 1994b) and Kaplan and Siegel (1994a, 1994b) engaged in a "tempest in a teapot". I should confess that I am strong supporter of downside risk measures and have used them in my teaching, research and software for the past two decades. Therefore, you should keep that bias in mind as you read this article. One of the best means to understand a concept is to study the history of its development. Understanding the issues facing researchers during the development of a concept results in better knowledge of the concept. The purpose of this paper is to provide an understanding of the measurement of downside risk. First, it helps to define terms. Portfolio theory is the application of decision-making tools unde

and participants at the 2001 Cambridge-Maastricht Symposium for Real Estate Finance and Economics for helpful comments. Remaining errors are, of course, the responsibility of the authors. Previous research has shown that the returns on individual properties and listed property securities are skewed (Lizieri and Ward 2001, Young and Graff 1995 and Liu et al. 1992). This claim is investigated in the context of listed UK property companies and US REITs. In particular, the shape of the conditional distribution of total monthly returns is examined for a group of 20 UK companies and 20 REITS listed continuously since 1970 and 1977, respectively. Also investigated is the claim of Young and Graff that the skewness found in property returns varies over time. Using the model of Hansen (1994) it is found that while a large portion of property security returns in the sample do exhibit skewness in the conditional distribution only in a few instances is there evidence of time variation in the skewness parameter. When time varying skewness is found there is little evidence to suggest it is associated with the economic cycle. The link between time varying skewness models and downside risk measures is also discussed and estimates of conditional downside risk are calculated for those companies exhibiting the time varying skewness property.

This paper examines possible barriers to securitization, focusing on behavioral responses to such novel instruments. These barriers include the difficulties of conveying the associated risks, even to investors who are sophisticated about finance (but still uncertain about model risk and structural uncertainties). Our analyses will draw on results in behavioral decision making and psychology. They will lead to proposals for empirical research and general strategies for making securities design more consonant with investor behavior.

This paper examines the stock market impact of announcements of corporate bond rating revisions for companies in the United Kingdom from January 1997 to December 2006 and compares alternative techniques for estimating abnormal returns. We employ four return generating models- the conventional market model, and three models augmented to allow for asymmetry in returns and downside risk- the quadratic market model, downside market model and higher order downside market model The market reaction to a rating change for different bond grades is also investigated. We find evidence of an announcement effect for bond downgrades, but not upgrades. Despite differences in approach, all four generating models produce generally similar results when used in the event studies. JEL classification: G12 and G14

Stock returns are determined both by news about cash flows and news about discount rates (Campbell and Vuolteenaho (2004)). In this paper we test whether asymmetric preferences for losses versus gains like in Ang, Chen, and Xing (2006) also affect the pricing of cash flow versus discount rate news. For this, we construct a new four-fold beta decomposition, distinguishing cash flow and discount rate betas in both up and down markets. We test which of the four betas is priced most consistently in the cross-section of CRSP stock returns. Our results indicate that the downside cash flow beta and downside discount rate beta carry the largest premium. We subject our result to an extensive number of robustness analyses, including the alternative decomposition methods for cash flow and discount rate news of Chen and Zhao (2008). The downside cash flow risk is priced most consistently across samples, periods, and methodologies. The cash flow premia estimates decrease with company size. Moreover, in terms of their economic contribution in explaining the level of average realized returns, it appears that the importance of both up and down discount rate news dominates the contribution of downside cash flow risk.

This article highlights the importance of investors’downside-risk concerns, and examines optimal investment behaviors in a dynamic downside-risk framework. The authors does not only derive an analytical expression of investors ’ optimal behaviors, but also provide economic insights of the properties of the downside risk measure and optimal investment strategies using comparative statics. It sheds light on both academic and practical applications of dynamic below-target semi-variance model to the …elds of risk management and investment decision making.

Abstract: For over 30 years academics and practitioners have been debating the merits of the CAPM. One of the characteristics of this model is that it measures risk by beta, which follows from an equilibrium in which investors display mean-variance behavior. In that framework, risk is assessed by the variance of returns, a questionable and restrictive measure of risk. The semivariance of returns is a more plausible measure of risk and can be used to generate an alternative behavioral hypothesis (mean-semivariance behavior), an alternative measure of risk for diversified investors (the downs ide beta), and an alternative pricing model (the D-CAPM). The empirical evidence discussed in this article for the entire MSCI database of developed and emerging markets clearly supports the downside beta and the D-CAPM over beta and the CAPM.

ABSTRACT: This paper incorporates an annual probability of corporate failure into a standard equity valuation model, as an alternative or complementary correction for risk that improves in several ways over conventional risk premia or ad hoc adjustments to assumed growth rates. Though the correction is nonlinear, it can be reduced to an equivalent function that enters the valuation equation in the traditional additive way. Empirical benchmarking suggests that, even without assuming risk averse investors, this approach comes closer to predicting observed equity premia than the traditional approach. Extensions of the model provide valuation under two growth regimes with stochastic transition time. The author is grateful for suggestions from Anil Kashyap and Fred Sterbenz.

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We propose a new measure of risk, based entirely on downwards moves measured using high frequency data. Realised semivariances are shown to have important predictive qualities for future market volatility. The theory of these new measures is spelt out, drawing on some new results from probability theory. Keywords: Market frictions; Quadratic variation; Realised variance; Semimartingale; Semivariance. 1 ‘It was understood that risk relates to an unfortunate event occurring, so for an investment this corresponds to a low, or even negative, return. Thus getting returns in the lower tail of the return distribution constitutes this “downside risk. ” However, it is not easy to get a simple measure of this risk. ’ Quoted from Granger (2008). 1