The Crash Risks of Style Investing: Can They Be Internationally Diversified?

27 Pages Posted: 10 Dec 2014 Last revised: 13 Aug 2015

See all articles by Timothy K. Chue

Timothy K. Chue

Hong Kong Polytechnic University

Yong Wang

Capital Market Statistics & Monitoring Center

Jin (Karen) Xu

Shanghai International Studies University

Date Written: December 4, 2014


Motivated by the growth in the popularity of style investing and the concern for extreme events among investors, we examine the tail risks of style investing in different countries. For the G7 countries over the 1981-2010 period, we evaluate whether portfolios with different size, value, or momentum tilts — the SMB (small minus big), HML (high minus low), and UMD (past winners minus past losers) portfolios — experience different crash risks, and whether these risks can be mitigated through international diversification. We find that the crash risks of momentum tend to be higher than those of size and value, where crash risks are measured by return skewness and expected shortfall. International diversification lowers the crash risks of size and value further, but has only limited effects on momentum. Specifically, a diversified, world UMD portfolio (equal-weighted portfolio of the G7 countries) tends to be more left-skewed and has a more negative expected shortfall than the momentum portfolios of individual countries. By contrast, the world SMB and HML portfolios tend to have less negative skewness and expected shortfall than their country-specific counterparts. By examining the conditional correlations and return coexceedances of style portfolios across countries, we find that the extreme negative returns on UMD in different markets tend to occur together, whereas those on SMB and HML tend to be country-specific. In fact, for SMB and HML, it is the right-tail events that tend to be more global in nature. These results suggest that the difference in the effect of international diversification is due to the left (right) tails of momentum (size and value) portfolios being more correlated than their right (left) tails across countries.

Keywords: Style investing, Crash risks, International diversification

Suggested Citation

Chue, Timothy K. and Wang, Yong and Xu, Jin, The Crash Risks of Style Investing: Can They Be Internationally Diversified? (December 4, 2014). Financial Analysts Journal, 2015, Volume 71, Number 3, p. 34-46., Available at SSRN: or

Timothy K. Chue

Hong Kong Polytechnic University ( email )

School of Accounting & Finance
Hung Hom
Hong Kong
(852) 2766-4995 (Phone)

Yong Wang

Capital Market Statistics & Monitoring Center ( email )


Jin Xu (Contact Author)

Shanghai International Studies University ( email )

1550 Wen Xiang Rd.
Songjiang District
Shanghai, Shanghai 201620

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