Multivariate Crash Risk

79 Pages Posted: 4 Jun 2018 Last revised: 29 Mar 2019

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 St. Gallen - School of Finance

Date Written: March 26, 2019

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

Suggested Citation

Chabi-Yo, Fousseni and Huggenberger, Markus and Weigert, Florian, Multivariate Crash Risk (March 26, 2019). 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 St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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