Two-Side Cvars and the Cross-Sectional Expected Stock Returns: Evidences from Chinese Stock Market

34 Pages Posted: 30 Oct 2019

See all articles by Aifan Ling

Aifan Ling

Jiangxi University of Finance and Economics

Zizi Cao

Jiangxi University of Finance and Economics

Date Written: October 11, 2019

Abstract

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

Suggested Citation

Ling, Aifan and Cao, Zizi, Two-Side Cvars and the Cross-Sectional Expected Stock Returns: Evidences from Chinese Stock Market (October 11, 2019). Available at SSRN: https://ssrn.com/abstract=3468275

Aifan Ling (Contact Author)

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Zizi Cao

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

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