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Crash Sensitivity and the Cross-Section of Expected Stock Returns

94 Pages Posted: 27 Feb 2012 Last revised: 12 Jun 2017

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Stefan Ruenzi

University of Mannheim - Department of International Finance

Florian Weigert

University of St. Gallen - School of Finance

Date Written: June 12, 2017

Abstract

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 strong LTD have higher average future returns than stocks with weak LTD. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, coskewness, cokurtosis, and Kelly and Jiang (2014)'s tail risk beta. Hence, our findings are consistent with the notion that investors are crash-averse.

Keywords: Asset Pricing, Asymmetric Dependence, Copulas, Coskewness, Downside Risk, Tail Risk, Crash Aversion

JEL Classification: C12, G01, G11, G12, G17

Suggested Citation

Chabi-Yo, Fousseni and Ruenzi, Stefan and Weigert, Florian, Crash Sensitivity and the Cross-Section of Expected Stock Returns (June 12, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; University of St.Gallen, School of Finance Research Paper No. 2013/24. Available at SSRN: https://ssrn.com/abstract=2011746 or http://dx.doi.org/10.2139/ssrn.2011746

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Stefan Ruenzi (Contact Author)

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Florian Weigert

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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