Downside Risk

38 Pages Posted: 30 Dec 2004

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Joseph Chen

University of California, Davis - Graduate School of Management

Yuhang Xing

Rice University

Multiple version iconThere are 3 versions of this paper

Date Written: March 3, 2004


Agents who place greater weight on the risk of downside losses than they are attach to upside gains demand greater compensation for holding stocks with high downside risk. We show that the cross-section of stock returns reflects a premium for downside risk. Stocks that covary strongly with the market when the market declines have high average returns. We estimate that the downside risk premium is approximately 6% per annum and demonstrate that the compensation for bearing downside risk is not simply compensation for market beta. Moreover, the reward for downside risk is not subsumed by coskewness or liquidity risk, and is robust to controlling for momentum and other cross-sectional effects.

Keywords: asymmetric risk, cross-sectional asset pricing, downside risk, first-order risk aversion, higher-order moments

JEL Classification: C12, C15, C32, G12

Suggested Citation

Ang, Andrew and Chen, Joseph S. and Xing, Yuhang, Downside Risk (March 3, 2004). AFA 2005 Philadelphia Meetings, Available at SSRN: or

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Joseph S. Chen

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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