The impact of downside risk on UK stock returns
Review of Accounting and Finance
ISSN: 1475-7702
Article publication date: 30 January 2019
Issue publication date: 13 March 2019
Abstract
Purpose
This paper aims to investigate patterns in UK stock returns related to downside risk, with particular focus on stock returns during financial crises.
Design/methodology/approach
First, stocks are sorted into five quintile portfolios based on the relevant beta values (classic beta, downside beta and upside beta, calculated by the moving window approach). Second, patterns of portfolio returns are examined during various sub-periods. Finally, predictive powers of beta and downside beta are examined.
Findings
The downside risk is observed to have a significant positive impact on contemporaneous stock returns and a negative impact on future returns in general. In contrast, an inverse relationship between risk and return is observed when stocks are sorted by beta, contrary to the classic literature. UK stock returns exhibit clear time sensitivity, especially during financial crises.
Originality/value
This paper focuses on the impact of the downside risk on UK stock returns, assessed via a comprehensive sub-period analysis. This paper fills the gap in the existing literature, in which very few studies examine the time sensitivity in relation to the downside risk and the risk-return anomaly in the UK stock market using a long sample period.
Keywords
Acknowledgements
The author thanks Professor Nick Taylor for his valuable comments and suggestions.
Citation
Huang, F. (2019), "The impact of downside risk on UK stock returns", Review of Accounting and Finance, Vol. 18 No. 1, pp. 53-70. https://doi.org/10.1108/RAF-07-2017-0139
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited