Multivariate Crash Risk

62 Pages Posted: 4 Jun 2018 Last revised: 8 Sep 2021

See all articles by Fousseni Chabi-Yo

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Markus Huggenberger

University of Mannheim - Department of Risk Theory, Portfolio Management and Insurance

Florian Weigert

University of Neuchatel - Institute of Financial Analysis; University of Cologne - Centre for Financial Research (CFR)

Date Written: September 08, 2021

Abstract

This paper investigates whether multivariate crash risk (MCRASH), defined as exposure to extreme realizations of multiple systematic factors, is priced in the cross-section of expected stock returns. We derive an extended linear model with a positive premium for MCRASH and we empirically confirm that stocks with high MCRASH earn significantly higher future returns than stocks with low MCRASH. The premium is not explained by linear factor exposures, alternative downside risk measures or stock characteristics. Extending market-based definitions of crash risk to other well-established factors helps to determine the cross-section of expected stock returns without further expanding the factor zoo.

Keywords: Asset pricing, Non-linear dependence, Crash aversion, Downside risk, Tail risk, Lower tail dependence, Copulas

JEL Classification: C58, G01, G11, G12, G17

Suggested Citation

Chabi-Yo, Fousseni and Huggenberger, Markus and Weigert, Florian, Multivariate Crash Risk (September 08, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3190027 or http://dx.doi.org/10.2139/ssrn.3190027

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Markus Huggenberger (Contact Author)

University of Mannheim - Department of Risk Theory, Portfolio Management and Insurance ( email )

Schloss
D-68131 Mannheim
Germany

Florian Weigert

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

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