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

Abstract

Sharpe’s (1964) beta was heavily criticized by scholars pinpointing many predicaments. Initially, the downside framework was introduced by Markowitz (1959) as an alternative to Sharpe’s beta. Many studies later investigated downside beta and its effectiveness in developed and developing markets. Egypt is considered an emerging market, characterized by thin trading, illiquidity, small number of listed firms, and relatively less corporate governance enforcement which may lead to weak form efficiency or inefficiency. As a result, typical asset pricing models designed and tested in developed markets may fail to account for these unique circumstances that exist in emerging countries as Egypt (Ragab, Abdou, & Sakr, 2020). This study aims to address the 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. It is concluded that the downside beta outperformed the conventional beta in the emerging market of Egypt. To our knowledge, very few articles investigated the validity of downside risk in MENA region, specifically Egypt, and this study adds to this debate.