A Downside Risk Puzzle

a hand holding a puzzle piece

Professor Craig Burnside, Duke University

Thursday 26 May 2022, 2:00pm - 3:00pm 


The University of Glasgow Adam Smith Business School's Finance cluster is delighted to be hosting a webinar on Thursday 26 May with Professor Craig Burnside. This webinar is free to attend and will include a presentation followed by a Q&A session. 

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A simple downside-risk model predicts that stocks that earn lower returns in bad times, should earn higher returns, on average, as compensation for this risk.  We show that the opposite is true for portfolios of US equities, sorted on the basis of a variety of conventional characteristics. This is puzzling because it suggests that investors care less about downside states than upside states.  More elaborate downside-risk models, based on the CAPM, emphasize the difference between market betas in downside and upside states and have more complex predictions. We construct a piecewise-linear stochastic discount factor model that nests these downside-risk versions of the CAPM.  Estimates of this model also suggest that investors care less about downside states than upside states.

Craig Burnside is the Mary Grace Wilson Distinguished Professor of Economics at Duke University, and a Research Professor in the University of Glasgow Adam Smith Business School. Previously, he held positions at Queen's University (Canada), the University of Pittsburgh, the World Bank, and the University of Virginia. He was a National Fellow of the Hoover Institution from 1998-99. His research has focused on US business cycles, government finance, foreign exchange markets, the effects of foreign aid, and the causes and consequences of currency crises. He is a Research Associate of the National Bureau of Economic Research and has served in editorial roles at the American Economic Review, the Canadian Journal of Economics, the Review of Economics and Statistics, and the Journal of Money, Credit and Banking. He received a PhD from Northwestern University in 1991, and a BA from the University of British Columbia in 1985. Canadian by birth, he also holds UK and US citizenship.

Please note; the views expressed are the opinion of the authors, Craig Burnside (Duke University) and Jeremy Graveline (Pluribus Labs), and do not represent the views of Pluribus Labs.


Further information: business-events@glasgow.ac.uk

First published: 3 May 2022

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