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Downside RiskJoseph ChenUniversity of California, Davis - Graduate School of Management Andrew AngColumbia Business School - Finance and Economics; National Bureau of Economic Research (NBER) Yuhang XingRice University December 2005 NBER Working Paper No. w11824 Abstract: Economists have long recognized that investors care differently about downside losses versus upside gains. Agents who place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements. We show that the cross-section of stock returns reflects a premium for downside risk. Specifically, stocks that covary strongly with the market when the market declines have high average returns. We estimate that the downside risk premium is approximately 6% per annum. The reward for bearing downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or size, book-to-market, and momentum characteristics.
Number of Pages in PDF File: 53 working papers seriesDate posted: February 20, 2006Suggested CitationContact Information
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