Downside Risk

Chen, Joseph; Ang, Andrew; Xing, Yuhang

doi:10.1093/rfs/hhj035

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Downside Risk

The Review of Financial Studies, Vol. 19, Issue 4, pp. 1191-1239, 2006

Posted: 29 Feb 2008

See all articles by Joseph Chen

Joseph Chen

University of California, Davis - Graduate School of Management

Yuhang Xing

Rice University

There 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: Suggested Citation

Chen, Joseph S. 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