Does downside beta matter in asset pricing?

By carefully choosing a data-generating process and appropriate distributional assumptions, we formulate a nested econometric model to examine how many equities are explained well by the downside beta or a general asymmetric response model rather than the conventional capital asset pricing model (CAPM) beta. Using UK equity data, we show that the downside beta explains 15-25% of equities in addition to CAPM that explains 50-80% of equities. These results suggest that although the lower partial moment CAPM explains equity returns better than the conventional CAPM, the proportion of equities benefiting from using the downside beta is not large enough to improve asset pricing models significantly.