Measuring Asymmetric Nature of Beta Using a Smooth Linear Transformation

Abstract

Prior studies have found weak evidence on the asymmetric nature of the beta coefficient based on upward and downward movements of the market by classifying market movements into two mutually exclusive and exhaustive series using a fixed threshold. Instead of using a directional measure, we used a smooth linear transformation function to measure both magnitude and direction of market movements which is scaled on the basis of the highest and lowest monthly market return during the preceding three years. Proposed classification can capture the asymmetric behavior of beta in a better way.