Downside Risk

53 Pages Posted: 20 Feb 2006 Last revised: 24 Apr 2022

See all articles by Joseph Chen

Joseph Chen

University of California, Davis - Graduate School of Management

Andrew Ang

BlackRock, Inc

Yuhang Xing

Rice University

Multiple version iconThere are 3 versions of this paper

Date Written: December 2005


Economists have long recognized that investors care differently about downside losses versus upside gains. Agents who place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements. We show that the cross-section of stock returns reflects a premium for downside risk. Specifically, 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. The reward for bearing downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or size, book-to-market, and momentum characteristics.

Suggested Citation

Chen, Joseph S. and Ang, Andrew and Xing, Yuhang, Downside Risk (December 2005). NBER Working Paper No. w11824, Available at SSRN:

Joseph S. Chen

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

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Andrew Ang (Contact Author)

BlackRock, Inc ( email )

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Yuhang Xing

Rice University ( email )

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United States