Loss Uncertainty, Gain Uncertainty, and Expected Stock Returns

50 Pages Posted: 6 Nov 2017 Last revised: 4 Nov 2019

See all articles by Bruno Feunou

Bruno Feunou

Bank of Canada

Ricardo Lopez Aliouchkin

Syracuse University - Whitman School of Management

Roméo Tédongap

ESSEC Business School

Lai Xu

Syracuse University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2, 2017

Abstract

We decompose the quadratic payoff on a stock into its loss and gain components and measure the premia associated with their fluctuations, called the loss and gain quadratic risk premium (QRP) respectively. The loss QRP interprets as the premium paid for downside risk hedging, while the gain QRP reads as the premium received for upside risk compensation. Long-short portfolio strategies based on the loss or gain QRP yield monthly risk-adjusted expected excess returns of up to 2.8%. This cross-sectional predictability survives a battery of robustness checks, and is reinforced among stocks experiencing limits to arbitrage, information asymmetry, and demand for lottery.

Keywords: Cross-section of stocks, out-of-the-money options, variance risk premium

JEL Classification: G12

Suggested Citation

Feunou, Bruno and Lopez Aliouchkin, Ricardo and Tédongap, Roméo and Xu, Lai, Loss Uncertainty, Gain Uncertainty, and Expected Stock Returns (November 2, 2017). Available at SSRN: https://ssrn.com/abstract=3064263 or http://dx.doi.org/10.2139/ssrn.3064263

Bruno Feunou

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8302 (Phone)

HOME PAGE: http://kamkui.net/

Ricardo Lopez Aliouchkin

Syracuse University - Whitman School of Management ( email )

721 University Ave
Syracuse, NY NY 13244
United States
+13154433672 (Phone)

HOME PAGE: http://www.ricardolopezaliouchkin.com/

Roméo Tédongap (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
+33134439734 (Phone)
+33134439734 (Fax)

Lai Xu

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

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