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Crash Sensitivity and the Cross Section of Expected Stock Returns

  • Fousseni Chabi-Yo, Stefan Ruenzi and Florian Weigert
Abstract

This article examines whether investors receive compensation for holding crash-sensitive stocks. We capture the crash sensitivity of stocks by their lower-tail dependence (LTD) with the market based on copulas. We find that stocks with strong LTD have higher average future returns than stocks with weak LTD. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, coskewness, cokurtosis, and Kelly and Jiang’s (2014) tail risk beta. Hence, our findings are consistent with the notion that investors are crash-averse.

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Corresponding author
* Chabi-Yo (corresponding author), fchabiyo@isenberg.umass.edu, University of Massachusetts-Amherst Isenberg School of Management; Ruenzi, ruenzi@bwl.uni-mannheim.de, University of Mannheim Department of Finance; and Weigert, florian.weigert@unisg.ch, University of St. Gallen Swiss Institute of Banking and Finance.
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The authors thank Andres Almazan, Turan Bali (associate editor and referee), Tobias Berg, Hendrik Bessembinder (the editor), Knut Griese, Allaudeen Hameed, Hao Jiang (referee), Maria Kasch, Bryan Kelly, Jaehoon Lee, Alexandra Niessen-Ruenzi, Thierry Post, Alexander Puetz, Sheridan Titman, Michael Weber, Filip Zikes, and seminar participants at the 2011 Eastern Economic Association (EEA) Conference, the 2011 European Finance Association (EFA) Conference, the 2011 German Finance Association (DGF) Conference, the 2011 Inquire Europe Autumn Seminar, the 2012 European Financial Management (EFM) Asset Management Symposium, the 2012 Swiss Society for Financial Market Research (SGF) Conference, the 2012 Financial Management Association (FMA) Europe Conference, the 2013 Financial Intermediation Research Society (FIRS) Conference, the 2013 Quantitative Methods in Finance (QMF) Conference, the 2013 Columbia Conference on “Copulas and Dependence,” University of Mannheim, University of Tilburg, and University of Texas at Austin for their helpful comments. This article was previously circulated under the title “Extreme Dependence Structures and the Cross-Section of Expected Stock Returns.” All errors are our own.

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