Crash Sensitivity and the Cross-Section of Expected Stock Returns
University of Mannheim - Department of International Finance
University of St. Gallen - SoF: School of Finance
March 28, 2013
University of St.Gallen, School of Finance Research Paper No. 2013/24
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, G17working papers series
Date posted: February 27, 2012 ; Last revised: March 27, 2014
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