Multivariate Crash Risk

Abstract

This paper investigates whether multivariate crash risk is priced in the cross- section of expected stock returns. Motivated by a theoretical asset pricing model, we capture the multivariate crash risk of a stock by a combined measure based on its expected shortfall and its multivariate lower tail dependence with the systematic factors of the Carhart (1997) model. We find that stocks with a high exposure to joint crashes of the market and the momentum factor bear a risk premium which is not explained by traditional linear factor models or by other downside risk measures. Our results indicate that accounting for the multivariate crash risk of established state variables helps to understand the cross-section of expected stock returns without further expanding the factor zoo.

Keywords: Asset Pricing, Asymmetric Dependence, Copulas, Crash Aversion, Downside Risk, Lower Tail Dependence, Tail Risk

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