Left-Tail Momentum: Limited Attention of Individual Investors and Expected Equity Returns
71 Pages Posted: 16 Nov 2017 Last revised: 10 Mar 2018
Date Written: November 14, 2017
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 find that the left-tail risk anomaly is stronger for stocks that are more likely to be held by retail investors and that receive less investor attention, underscoring the importance of investor clientele and inattention mechanisms. We also provide an alternative explanation showing that individual 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.
Keywords: left-tail risk, momentum, equity returns, retail investors, investor inattention
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation