Skip to main content Accessibility help
Hostname: page-component-99c86f546-t82dr Total loading time: 0.31 Render date: 2021-11-29T10:02:28.624Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }

Crash Sensitivity and the Cross Section of Expected Stock Returns

Published online by Cambridge University Press:  13 June 2018

Rights & Permissions[Opens in a new window]


HTML view is not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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.

Research Article
Copyright © Michael G. Foster School of Business, University of Washington 2018 



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.


Abdellaoui, M.Parameter-Free Elicitation of Utility and Probability Weighting Functions.” Management Science, 46 (2000), 14971512.CrossRefGoogle Scholar
Agarwal, V.; Ruenzi, S.; and Weigert, F.. “Tail Risk in Hedge Funds: A Unique View from Portfolio Holdings.” Journal of Financial Economics, 125 (2017), 610636.CrossRefGoogle Scholar
Allen, L.; Bali, T. G.; and Tang, Y.. “Does Systematic Risk in the Financial Sector Predict Future Economic Downturns?Review of Financial Studies, 25 (2012), 30003036.CrossRefGoogle Scholar
Altman, E. I.Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589610.CrossRefGoogle Scholar
Amihud, Y.Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 3156.CrossRefGoogle Scholar
Ané, T., and Kharoubi, C.. “Dependence Structure and Risk Measure.” Journal of Business, 76 (2003), 411438.CrossRefGoogle Scholar
Ang, A.; Bekaert, G.; and Liu, J.. “Why Stocks May Disappoint.” Journal of Financial Economics, 76 (2005), 471508.CrossRefGoogle Scholar
Ang, A., and Chen, J.. “CAPM over the Long Run: 1926–2001.” Journal of Empirical Finance, 14 (2007), 140.CrossRefGoogle Scholar
Ang, A.; Chen, J.; and Xing, Y.. “Downside Risk.” Review of Financial Studies, 19 (2006), 11911239.CrossRefGoogle Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “The Cross-Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006), 259299.CrossRefGoogle Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence.” Journal of Financial Economics, 91 (2009), 123.CrossRefGoogle Scholar
Ang, A.; Liu, J.; and Schwarz, K.. “Using Individual Stocks or Portfolios in Tests of Factor Models.” Working Paper, Columbia University, University of California San Diego, and University of Pennsylvania (2017).Google Scholar
Arrow, K.“Aspects of the Theory of Risk-Bearing.” Helsinki, Finland: Yrjö Jahnssonin Säätiö (1965).Google Scholar
Artavanis, N.“On the Estimation of Systematic Downside Risk.” Working Paper, University of Massachusetts at Amherst (2014).Google Scholar
Baker, M., and Wurgler, J.. “Investor Sentiment and the Cross-Section of Stock Returns.” Journal of Finance, 61 (2006), 16451680.CrossRefGoogle Scholar
Bakshi, G.; Kapadia, N.; and Madan, D.. “Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options.” Review of Financial Studies, 16 (2003), 103143.CrossRefGoogle Scholar
Bakshi, G., and Madan, D.. “Spanning and Derivative-Security Valuation.” Journal of Financial Economics, 55 (2000), 205238.CrossRefGoogle Scholar
Bali, T. G.; Brown, S. J.; Murray, S.; and Tang, Y.. “A Lottery Demand-Based Explanation of the Beta Anomaly.” Journal of Financial and Quantitative Analysis, 52 (2017), 23692397.CrossRefGoogle Scholar
Bali, T. G.; Brown, S. J.; and Tang, Y.. “Is Economic Uncertainty Priced in the Cross-Section of Stock Returns?Journal of Financial Economics, 126 (2017), 471489.CrossRefGoogle Scholar
Bali, T. G., and Cakici, N.. “Idiosyncratic Volatility and the Cross-Section of Expected Returns.” Journal of Financial and Quantitative Analysis, 43 (2008), 2958.CrossRefGoogle Scholar
Bali, T. G.; Cakici, N.; and Whitelaw, R. F.. “Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns.” Journal of Financial Economics, 99 (2011), 427446.CrossRefGoogle Scholar
Bali, T. G.; Cakici, N.; and Whitelaw, R. F.. “Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?Review of Asset Pricing Studies, 4 (2014), 206246.CrossRefGoogle Scholar
Bali, T. G.; Cakici, N.; Yan, X.; and Zhang, Z.. “Does Idiosyncratic Risk Really Matter?Journal of Finance, 60 (2005), 905929.CrossRefGoogle Scholar
Bali, T. G.; Demirtas, K. O.; and Levy, H.. “Is There an Intertemporal Relation between Downside Risk and Expected Returns?Journal of Financial and Quantitative Analysis, 44 (2009), 883909.CrossRefGoogle Scholar
Barberis, N., and Huang, M.. “Mental Accounting, Loss Aversion, and Individual Stock Returns.” Journal of Finance, 56 (2001), 12471292.CrossRefGoogle Scholar
Barberis, N.; Huang, M.; and Santos, T.. “Prospect Theory and Asset Prices.” Quarterly Journal of Economics, 116 (2001), 153.CrossRefGoogle Scholar
Barro, R.Rare Disasters and Asset Markets in the Twentieth Century.” Quarterly Journal of Economics, 121 (2006), 823866.CrossRefGoogle Scholar
Barro, R.Rare Disasters, Asset Prices, and Welfare Costs.” American Economic Review, 99 (2009), 243264.CrossRefGoogle Scholar
Bates, D. S.Post-’87 Crash Fears in the S&P 500 Futures Option Market.” Journal of Econometrics, 94 (2000), 181238.CrossRefGoogle Scholar
Bawa, V. S., and Lindenberg, E. B.. “Capital Market Equilibrium in a Mean-Lower Partial Moment Framework.” Journal of Financial Economics, 5 (1977), 189200.CrossRefGoogle Scholar
Benartzi, S., and Thaler, R. H.. “Myopic Loss Aversion and the Equity Premium Puzzle.” Quarterly Journal of Economics, 110 (1995), 7392.CrossRefGoogle Scholar
Berkman, H.; Jacobsen, B.; and Lee, J. B.. “Time-Varying Rare Disaster Risk and Stock Returns.” Journal of Financial Economics, 101 (2011), 313332.CrossRefGoogle Scholar
Bollerslev, T., and Todorov, V.. “Tails, Fears, and Risk Premia.” Journal of Finance, 66 (2011), 21652211.CrossRefGoogle Scholar
Carhart, M.On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 5782.CrossRefGoogle Scholar
Carr, P., and Madan, D.. “Optimal Positioning in Derivative Securities.” Quantitative Finance, 1 (2001), 1937.CrossRefGoogle Scholar
Chabi-Yo, F.Pricing Kernels with Stochastic Skewness and Volatility Risk.” Management Science, 58 (2012), 624640.CrossRefGoogle Scholar
Charpentier, A.; Fermanian, J. D.; and Scaillet, O.. “The Estimation of Copulas: Theory and Practice.” In Copulas: From Theory to Application in Finance, Rank, J., ed. London, UK: Risk Books (2007).Google Scholar
Chen, H.; Joslin, S.; and Tran, N. K.. “Rare Disasters and Risk Sharing with Heterogeneous Beliefs.” Review of Financial Studies, 25 (2012), 21892224.CrossRefGoogle Scholar
Cholette, L., and Lu, C. C.. “The Market Premium for Dynamic Tail Risk.” Working Paper, University of Stavanger and National Chengchi University (2011).Google Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 10351058.CrossRefGoogle Scholar
Deheuvels, P.A Non-Parametric Test for Independence.” Publications de l’Institut de Statistique de l’Université de Paris, 26 (1981), 2950.Google Scholar
Dittmar, R.Nonlinear Pricing Kernels, Kurtosis Preference, and the Cross-Section of Equity Returns.” Journal of Finance, 57 (2002), 369403.CrossRefGoogle Scholar
Eeckhoudt, L., and Schlesinger, H.. “Putting Risk in Its Proper Place.” American Economic Review, 96 (2006), 280289.CrossRefGoogle Scholar
Elkamhi, R., and Stefanova, D.. “Dynamic Hedging and Extreme Asset Co-Movements.” Review of Financial Studies, 28 (2015), 743790.CrossRefGoogle Scholar
Embrechts, P.; McNeil, A.; and Straumann, D.. “Correlation and Dependence in Risk Management: Properties and Pitfalls.” In Risk Management: Value at Risk and Beyond, Dempster, M. A. H., ed. Cambridge, UK: Cambridge University Press (2002).Google Scholar
Estrada, J.The Cost of Equity of Internet Stocks: A Downside Risk Approach.” European Journal of Finance, 10 (2004), 239254.CrossRefGoogle Scholar
Fama, E. F.The Behavior of Stock-Market Prices.” Journal of Business, 38 (1965), 34105.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427465.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 122.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607636.CrossRefGoogle Scholar
Fan, Y., and Patton, A.. “Copulas in Econometrics.” Annual Review of Economics, 6 (2014), 179200.CrossRefGoogle Scholar
Fang, H., and Lai, T. Y.. “Co-Kurtosis and Capital Asset Pricing.” Financial Review, 32 (1997), 293307.CrossRefGoogle Scholar
Fermanian, J. D., and Scaillet, O.. “Some Statistical Pitfalls in Copula Modeling for Financial Applications.” In Capital Formation, Governance, and Banking, Klein, E., ed. Hauppauge, NY: Nova Science (2005).Google Scholar
Frahm, G.; Junker, M.; and Schmidt, R.. “Estimating the Tail-Dependence Coefficient: Properties and Pitfalls.” Insurance: Mathematics and Economics, 37 (2005), 80100.Google Scholar
Frazzini, A., and Pedersen, L. H.. “Betting against Beta.” Journal of Financial Economics, 111 (2013), 125.CrossRefGoogle Scholar
Friend, I., and Westerfield, R.. “Co-Skewness and Capital Asset Pricing.” Journal of Finance, 35 (1980), 897913.CrossRefGoogle Scholar
Gabaix, X.Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance.” Quarterly Journal of Economics, 127 (2012), 645700.CrossRefGoogle Scholar
Genest, C.; Ghoudi, K.; and Rivest, L. P.. “A Semiparametric Estimation Procedure of Dependence Parameters in Multivariate Families of Distributions.” Biometrika, 82 (1995), 543552.CrossRefGoogle Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Neglected Risks: The Psychology of Financial Crises.” American Economic Review, 105 (2015), 310314.CrossRefGoogle Scholar
Gul, F.A Theory of Disappointment Aversion.” Econometrica, 59 (1992), 667686.CrossRefGoogle Scholar
Harlow, W. V., and Rao, R.. “Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 24 (1989), 285311.CrossRefGoogle Scholar
Harvey, C. R., and Siddique, A.. “Conditional Skewness in Asset Pricing Tests.” Journal of Finance, 55 (2000), 12631295.CrossRefGoogle Scholar
He, X. D., and Zhou, X. Y.. “Hope, Fear, and Aspirations.” Mathematical Finance, 26 (2013), 310.CrossRefGoogle Scholar
Hill, B.A Simple General Approach to Inference about the Tail of a Distribution.” Annals of Statistics, 3 (1975), 11631164.CrossRefGoogle Scholar
Hogan, W., and Warren, J.. “Towards the Development of an Equilibrium Capital-Market Model Based on Semi-Variance.” Journal of Financial and Quantitative Analysis, 9 (1974), 111.CrossRefGoogle Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Digesting Anomalies: An Investment Approach.” Review of Financial Studies, 28 (2015), 650705.CrossRefGoogle Scholar
Joe, H. Multivariate Models and Dependence Concepts. London, UK: Chapman & Hall (1997).CrossRefGoogle Scholar
Jondeau, E., and Rockinger, M.. “The Copula-GARCH Model of Conditional Dependencies: An International Stock Market Application.” Journal of International Money and Finance, 25 (2006), 827853.CrossRefGoogle Scholar
Kahneman, D., and Tversky, A.. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica, 47 (1979), 263291.CrossRefGoogle Scholar
Kelly, B., and Jiang, H.. “Tail Risk and Asset Prices.” Review of Financial Studies, 27 (2014), 28412871.CrossRefGoogle Scholar
Kimball, M.Precautionary Saving in the Small and in the Large.” Econometrica, 58 (1990), 5373.CrossRefGoogle Scholar
Kimball, M.Standard Risk Aversion.” Econometrica, 61 (1993), 589611.CrossRefGoogle Scholar
Kraus, A., and Litzenberger, R. H.. “Skewness Preference and the Valuation of Risk Assets.” Journal of Finance, 31 (1976), 10851100.Google Scholar
Lettau, M.; Maggiori, M.; and Weber, M.. “Conditional Risk Premia in Currency Markets and Other Asset Classes.” Journal of Financial Economics, 114 (2014), 197225.CrossRefGoogle Scholar
Lintner, J.The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, 47 (1965), 1337.CrossRefGoogle Scholar
Longin, F., and Solnik, B.. “Extreme Correlation of International Equity Markets.” Journal of Finance, 56 (2001), 649676.CrossRefGoogle Scholar
Mandelbrot, B.The Variation in Certain Speculative Prices.” Journal of Business, 36 (1963), 394419.CrossRefGoogle Scholar
Markowitz, H. Portfolio Selection. New Haven, CT: Yale University Press (1959).Google Scholar
Newey, W. K., and West, K. D.. “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R. F.. “Liquidity Risk and Expected Returns.” Journal of Political Economy, 111 (2003), 642685.CrossRefGoogle Scholar
Patton, A. J.On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation.” Journal of Financial Econometrics, 2 (2004), 130168.CrossRefGoogle Scholar
Patton, A. J.Modelling Asymmetric Exchange Rate Dependence.” International Economic Review, 47 (2006), 527556.CrossRefGoogle Scholar
Patton, A. J.Are Market Neutral Hedge Funds Really Market Neutral?Review of Financial Studies, 22 (2009), 24952530.CrossRefGoogle Scholar
Pindyck, R. S., and Wang, N.. “The Economic and Policy Consequences of Catastrophes.” American Economic Journal: Economic Policy, 5 (2013), 306339.Google Scholar
Polkovnichenko, V., and Zhao, F.. “Probability Weighting Functions Implied by Options Prices.” Journal of Financial Economics, 107 (2013), 580609.CrossRefGoogle Scholar
Poon, S. H.; Rockinger, M.; and Tawn, J.. “Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications.” Review of Financial Studies, 17 (2004), 581610.CrossRefGoogle Scholar
Post, T.; van Vliet, P.; and Lansdorp, S.. “Sorting Out Downside Beta.” Working Paper, Koç University and Robeco Asset Management (2012).Google Scholar
Pratt, J. W.Risk Aversion in the Small and Large.” Econometrica, 32 (1964), 122136.CrossRefGoogle Scholar
Routledge, B., and Zin, S.. “Generalized Disappointment Aversion and Asset Prices.” Journal of Finance, 65 (2010), 13031332.CrossRefGoogle Scholar
Roy, A. D.Safety First and the Holdings of Assets.” Econometrica, 20 (1952), 431449.CrossRefGoogle Scholar
Rubinstein, M.Implied Binomial Trees.” Journal of Finance, 49 (1994), 771813.CrossRefGoogle Scholar
Sadka, R.Momentum and Post-Earnings-Announcement Drift Anomalies: The Role of Liquidity Risk.” Journal of Financial Economics, 80 (2006), 309349.CrossRefGoogle Scholar
Sharpe, W. F.Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, 19 (1964), 425442.Google Scholar
Tawn, J.Bivariate Extreme Value Theory: Models and Estimation.” Biometrika, 75 (1988), 397415.CrossRefGoogle Scholar
Van Oordt, M. R. K., and Zhou, C.. “Systematic Tail Risk.” Journal of Financial and Quantitative Analysis, 51 (2016), 685705.CrossRefGoogle Scholar
Vanden, J.Options Trading and the CAPM.” Review of Financial Studies, 17 (2004), 207238.CrossRefGoogle Scholar
Vanden, J.Option Coskewness and Capital Asset Pricing.” Review of Financial Studies, 19 (2006), 12791320.CrossRefGoogle Scholar
Supplementary material: PDF

Chabi-Yo et al. supplementary material


Download Chabi-Yo et al. supplementary material(PDF)
PDF 365 KB
You have Access
Cited by

Send article to Kindle

To send this article to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the or variations. ‘’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Crash Sensitivity and the Cross Section of Expected Stock Returns
Available formats

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

Crash Sensitivity and the Cross Section of Expected Stock Returns
Available formats

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

Crash Sensitivity and the Cross Section of Expected Stock Returns
Available formats

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *