Downside risk and Volatility

Abstract

We study how downside risk(DR) concern the volatility effect that stocks with low volatility earn high returns. We examine measures of DR for order-consistency, risk-return trade-off, accessibility and show the desirability of zero-targeted semivariance. In Japanese stock market, we find empirical evidences of DR involves a trade-off between risk and return, but upsiderisk(UR) does “reverse" trade-off. This suggests that investors require positive premium for DR and negative for UR. Our results provide new explanations for return-reversal and the volatility effect anomalies.