Two-Side Cvars and the Cross-Sectional Expected Stock Returns: Evidences from Chinese Stock Market
34 Pages Posted: 30 Oct 2019
Date Written: October 11, 2019
Tail risks attract recently lots of attentions to predict the cross-sectional expected returns of stocks in literature. Using a modified conditional value at risk (CVaR), the extreme loss and gain of stocks can be measured by the left tail CVaR- and the right tail CVaR+, respectively. The left and right tail CVaRs are unified as two-side CVaRs which correspond to the two-side tails of returns. We empirically examine the relations between two-side CVaRs and the cross-sectional expected returns of stocks and find, economically and statistically, that both have significantly negative relations with the cross-sectional expected returns. The empirical results are robust when we control the firm size, idiosyncratic volatility, liquidity risk, downside beta and the maximum daily return in previous month (MAX). The pricing powers of two-side CVaRs are strongly significant and can not be explained by the Fama-French three- and five-factor models.
Keywords: Asset pricing, extreme loss and gain, two-side CVaRs, tail risk
JEL Classification: G11, G17, G12
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