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Downside Risk

Posted: 29 Feb 2008  

Joseph Chen

University of California, Davis - Graduate School of Management

Andrew Ang

BlackRock, Inc

Yuhang Xing

Rice University

Multiple version iconThere are 3 versions of this paper

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 downside risk premium of approximately 6% per annum. Stocks that covary strongly with the market during market declines have high average returns. The reward for beasring downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or by size, value, and momentum characteristics. (JEL C12, C15, C32, G12)

Suggested Citation

Chen, Joseph and Ang, Andrew and Xing, Yuhang, Downside Risk. The Review of Financial Studies, Vol. 19, Issue 4, pp. 1191-1239, 2006. Available at SSRN: https://ssrn.com/abstract=1097950 or http://dx.doi.org/10.1093/rfs/hhj035

Joseph S. Chen

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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