Does downside beta matter in asset pricing? Evidence from the Egyptian Stock Exchange

Abstract

Several scholars pinpointed many predicaments in Sharpe's (1964) beta leading to the introduction of downside framework by Markowitz (1959). Subsequently, later studies investigated downside beta and its effectiveness in developed and developing markets. Egypt, an emerging market, exhibits characteristics such as thin trading, illiquidity, small number of listed firms, and relatively weaker corporate governance enforcement, which impacts its market efficiency. Thus, conventional beta designed and tested in developed markets may fail to account for these unique circumstances that exist in emerging countries as Egypt. This study aims to address this gap in the literature by testing the validity of conventional and downside risk measures using data from 55 Egyptian equity funds from 2012 to 2022. Fama & MacBeth's (1973) two-stage regression was employed. In the first stage, the downside beta was employed using Estrada's (2002) approach. Afterwards, the funds' excess returns over risk-free rate are regressed on the funds' risk measures. Results suggest a slight advantage for downside beta, indicated by a higher adjusted Rsquared. Moreover, a robustness check was employed by dividing the sample into two sub-periods. The findings revealed that the conventional beta is unstable, while downside beta demonstrated consistent and significant results. These empirical findings align with previous studies by Yildiz et al. (2022), Ruthkowska-Ziarko et al. (2022), and Alrabadi et al. (2022.