Crash Sensitivity and the Cross-Section of Expected Stock Returns
Ohio State University (OSU) - Fisher College of Business
University of Mannheim - Department of International Finance
University of St. Gallen - SoF: School of Finance
June 28, 2014
We examine whether investors receive compensation for holding crash-sensitive stocks. Motivated by a simple asset pricing model, we capture the crash sensitivity of stocks by their lower tail dependence (LTD) with the market based on copulas. We find that stocks with weak LTD serve as a hedge during crises, but, overall, stocks with strong LTD clearly outperform. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, coskewness, and cokurtosis. Our findings are consistent with results from the empirical option pricing literature and support the notion that stock market investors are crash-averse.
Number of Pages in PDF File: 78
Keywords: Asset Pricing, Asymmetric Dependence, Copulas, Coskewness, Downside Risk, Tail Risk, Crash Aversion
JEL Classification: C12, G01, G11, G12, G17working papers series
Date posted: February 27, 2012 ; Last revised: August 4, 2014
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