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 - School of Finance
December 27, 2015
University of St.Gallen, School of Finance Research Paper No. 2013/24
This paper examines whether investors receive compensation for holding crash-sensitive stocks. 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 have higher average future returns. 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 investors are crash-averse.
Number of Pages in PDF File: 56
Keywords: Asset Pricing, Asymmetric Dependence, Copulas, Coskewness, Downside Risk, Tail Risk, Crash Aversion
JEL Classification: C12, G01, G11, G12, G17
Date posted: February 27, 2012 ; Last revised: February 12, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollobot1 in 1.032 seconds