Crash Sensitivity and the Cross-Section of Expected Stock Returns
94 Pages Posted: 27 Feb 2012 Last revised: 12 Jun 2017
Date Written: June 12, 2017
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
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