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 shed...

Portfolio and asset pricing theory use symmetric volatility measures to evaluate risk. We propose a method to isolate the risk that the portfolio suffers a loss, separate from the risk that the portfolio reaps uncommon gains. Specifically we take advantage of the one-sided nature of option payments and show how downside risk will only affect the value of a put option (with correctly specified s...

Traditionally, downside risk aversion is the study of the placement of a pure risk (a secondary risk) on either the upside or the downside of a primary two-state risk. When the decision maker prefers to have the secondary risk placed on the upside rather than the downside of the primary lottery, he is said to display downside risk aversion. The literature on the intensity of downside risk avers...

If investors are more averse to the risk of losses on the downside than of gains on the upside, investors ought to demand greater compensation for holding stocks with greater downside risk. Downside correlations better capture the asymmetric nature of risk than downside betas, since conditional betas exhibit little asymmetry across falling and rising markets. We find that stocks with high downs...

In this paper, we advance a definition of greater downside risk aversion that applies to both large and small changes in risk preference, and thereby complements the results for small changes reported previously. We show that a downside riskaverse transformation of a utility function results in a function that is more downside risk averse in the same manner that a risk-averse transformation inc...

We propose a new estimator for expected shortfall that uses asymptotic expansions to account for the asymmetry and heavy tails in financial returns. We provide all the necessary formulas for decomposing estimators of value-at-risk and expected shortfall based on asymptotic expansions and show that this new methodology is very useful for analyzing and predicting the risk properties of portfolios...

Based on Jewitt (1986) we try to find a characterization of comparative downside risk aversion and love. The desired characterizations involve the decomposition of the dual of the intersection of two convexity cones. The decomposition holds in the case of downside risk love, but not in the case of downside risk aversion. A counterexample is provided. JEL Classification System: D81.