Extreme downside risk and expected stock returns
Huang W.; Liu Q.; Ghon Rhee S.; Wu F.
Source PublicationJournal of Banking and Finance
AbstractWe propose a measure for extreme downside risk (EDR) to investigate whether bearing such a risk is rewarded by higher expected stock returns. By constructing an EDR proxy with the left tail index in the classical generalized extreme value distribution, we document a significantly positive EDR premium in cross-section of stock returns even after controlling for market, size, value, momentum, and liquidity effects. The EDR premium is more prominent among glamor stocks and when high market returns are expected. High-EDR stocks are generally characterized by high idiosyncratic risk, large downside beta, lower coskewness and cokurtosis, and high bankruptcy risk. The EDR premium persists after these characteristics are controlled for. Although Value at Risk (VaR) plays a significant role in explaining the EDR premium, it cannot completely subsume the EDR effect. © 2012 Elsevier B.V.
KeywordBankruptcy risk Extreme downside risk Generalized extreme value distribution Idiosyncratic risk
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Cited Times [WOS]:38   [WOS Record]     [Related Records in WOS]
Document TypeJournal article
CollectionUniversity of Macau
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GB/T 7714
Huang W.,Liu Q.,Ghon Rhee S.,et al. Extreme downside risk and expected stock returns[J]. Journal of Banking and Finance,2012,36(5):1492.
APA Huang W.,Liu Q.,Ghon Rhee S.,&Wu F..(2012).Extreme downside risk and expected stock returns.Journal of Banking and Finance,36(5),1492.
MLA Huang W.,et al."Extreme downside risk and expected stock returns".Journal of Banking and Finance 36.5(2012):1492.
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