Left-Tail Momentum: Underreaction to Bad News, Costly Arbitrage and Equity Returns

85 Pages Posted: 16 Nov 2017 Last revised: 19 Dec 2018

See all articles by Yigit Atilgan

Yigit Atilgan

Sabanci University

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

K. Ozgur Demirtas

Sabanci University Graduate School of Management

A. Doruk Gunaydin

Sabanci University

Date Written: November 14, 2017

Abstract

This paper documents a significantly negative cross-sectional relation between left-tail risk and future returns on individual stocks trading in the U.S. and international countries. We provide a behavioral explanation to this anomaly based on the idea that investors underestimate the persistence in left-tail risk and overprice stocks with large recent losses. Thus, low returns in the left-tail of the distribution persist into the future causing left-tail return momentum. We find that the left-tail risk anomaly is stronger for stocks that are more likely to be held by retail investors, that receive less investor attention and that are costlier to arbitrage.

Keywords: left-tail risk, momentum, equity returns, retail investors, costly arbitrage, investor inattention

JEL Classification: G10, G11, G12

Suggested Citation

Atilgan, Yigit and Bali, Turan G. and Demirtas, K. Ozgur and Gunaydin, A. Doruk, Left-Tail Momentum: Underreaction to Bad News, Costly Arbitrage and Equity Returns (November 14, 2017). Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3070777 or http://dx.doi.org/10.2139/ssrn.3070777

Yigit Atilgan

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://faculty.msb.edu/tgb27/

K. Ozgur Demirtas

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

A. Doruk Gunaydin

Sabanci University ( email )

School of Management
Orhanli Tuzla
İstanbul, 34956
Turkey

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