Crash Aversion and the Cross-Section of Expected Stock Returns Worldwide
Review of Asset Pricing Studies (2016)
60 Pages Posted: 14 Aug 2013 Last revised: 13 Jan 2017
Date Written: November 25, 2015
This paper examines whether investors receive a compensation for holding stocks with a strong sensitivity to extreme market downturns in a sample covering 40 different countries. Worldwide, stocks with strong crash sensitivity deliver average returns of more than 7% p.a. higher than stocks with weak crash sensitivity. The effect is robust across geographical subsamples and is not explained by systematic risk factors and alternative firm characteristics. I show that the risk premium is particularly pronounced in countries that display negative market skewness, high income per capita, and rank high on the Hofstede (2001) individualism index.
Keywords: Asset Pricing, Crash Aversion, International Finance, Tail Risk
JEL Classification: C12, G01, G11, G12, G15, G17, F30
Suggested Citation: Suggested Citation