Downside Risk and the Momentum Effect

48 Pages Posted: 14 Dec 2001 Last revised: 25 Oct 2010

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Joseph Chen

University of California, Davis - Graduate School of Management

Yuhang Xing

Rice University

Date Written: December 2001

Abstract

Stocks with greater downside risk, which is measured by higher correlations conditional on downside moves of the market, have higher returns. After controlling for the market beta, the size effect and the book-to-market effect, the average rate of return on stocks with the greatest downside risk exceeds the average rate of return on stocks with the least downside risk by 6.55% per annum. Downside risk is important for explaining the cross-section of expected returns. In particular of the profitability of investing in momentum strategies can be explained as compensation for bearing high exposure to downside risk.

Suggested Citation

Ang, Andrew and Chen, Joseph S. and Xing, Yuhang, Downside Risk and the Momentum Effect (December 2001). NBER Working Paper No. w8643. Available at SSRN: https://ssrn.com/abstract=294082

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Joseph S. Chen

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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