Global Downside Risk and Equity Returns
58 Pages Posted: 19 Jul 2019
Date Written: July 19, 2019
This paper reexamines the relation between various downside risk measures and future equity returns in a global context that spans 26 developed markets. We find that there is no significantly positive relation between systematic downside risk and the cross-section of equity returns, and in fact, this relation is mostly negative. Moreover, stock-specific risk measures such as lower partial moment or extreme left tail risk measures such as value-at-risk and expected shortfall have a negative predictive relation with future equity returns. These negative relations are weaker but still observable for value-weighted portfolios. Focusing on additional test assets indicates a significantly negative relation between downside risk and future returns at the portfolio level whereas this relation is flat at the equity index level.
Keywords: downside risk, tail risk, left-tail momentum, equity returns, international finance
JEL Classification: G10, G11, G12
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