Downside Risk and Long-Horizon Stock Return Reversals

30 Pages Posted: 18 Mar 2012 Last revised: 28 Jan 2013

See all articles by Nikolaos T. Artavanis

Nikolaos T. Artavanis

Tulane University

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: January 15, 2012

Abstract

We argue that long-horizon return reversals [Debondt and Thaler (1985)] reflect a premium for downside risk. Consistent with this, we find that downside betas of past losers are significantly greater than downside betas of past winners, and the inclusion of downside beta in Fama-Macbeth regressions subsumes the reversal effect. We note that downside risk offers a theoretical justification for the “distress risk” explanation for long-horizon return reversals of Fama and French (1996). Consistent with this view, we find that downside beta is more highly correlated with firm characteristics associated with distress (dividend reductions and delisting) and explains long-horizon return reversals better than SMB/HML and other proxies for distress risk in the literature.

Keywords: downside risk, stock reversals, downside beta, contrarian effect, market efficiency

JEL Classification: C13, G12

Suggested Citation

Artavanis, Nikolaos T. and Kadlec, Gregory B., Downside Risk and Long-Horizon Stock Return Reversals (January 15, 2012). Available at SSRN: https://ssrn.com/abstract=2023959 or http://dx.doi.org/10.2139/ssrn.2023959

Nikolaos T. Artavanis (Contact Author)

Tulane University ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4316 (Phone)

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