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http://ssrn.com/abstract=2011746
 
 

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Crash Sensitivity and the Cross-Section of Expected Stock Returns


Stefan Ruenzi


University of Mannheim - Department of International Finance

Florian Weigert


University of St. Gallen - SoF: School of Finance

March 28, 2013

University of St.Gallen, School of Finance Research Paper No. 2013/24

Abstract:     
We examine whether investors receive a compensation for holding crash-sensitive stocks. We capture the crash sensitivity of stocks by their lower tail dependence with the market based on copulas. Stocks with strong contemporaneous crash sensitivity clearly outperform stocks with weak crash sensitivity and a trading strategy based on past crash sensitivity delivers positive abnormal returns of about 4% p.a. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, and coskewness. 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: 76

Keywords: Asset Pricing, Asymmetric dependence, Copulas, Coskewness, Downside Risk, Tail Risk, Crash Aversion

JEL Classification: C12, G01, G11, G12, G17

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Date posted: February 27, 2012 ; Last revised: March 27, 2014

Suggested Citation

Ruenzi, Stefan and Weigert, Florian, Crash Sensitivity and the Cross-Section of Expected Stock Returns (March 28, 2013). University of St.Gallen, School of Finance Research Paper No. 2013/24. Available at SSRN: http://ssrn.com/abstract=2011746 or http://dx.doi.org/10.2139/ssrn.2011746

Contact Information

Stefan Ruenzi (Contact Author)
University of Mannheim - Department of International Finance ( email )
L9, 1-2
Mannheim, 68131
Germany
Florian Weigert
University of Saint Gallen - SoF: School of Finance ( email )
Rosenbergstrasse 52
St.Gallen, CH-9000
Switzerland
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