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How is the change in left-tail risk priced in China?

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  • Sun, Kaisi
  • Wang, Hui
  • Zhu, Yifeng

Abstract

In this paper, we find a negative cross-sectional relationship between the change in left-tail risk and expected returns in the Chinese stock market. This effect cannot be explained by the common control variables and existing factor models in China, including the four-factor model (CH4) proposed by Liu, Stambaugh, and Yuan (2019). The predictive power of the change in left tail risk on expected returns can persist several months into the future, which may due to the strong prior beliefs of investors and the slow diffusion of fundamental information. Additionally, we observe that investors exhibit a stronger preference toward change in left-tail risk for stocks with lower capital gains overhang (CGO).

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  • Sun, Kaisi & Wang, Hui & Zhu, Yifeng, 2022. "How is the change in left-tail risk priced in China?," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21002109
    DOI: 10.1016/j.pacfin.2021.101703
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    More about this item

    Keywords

    Change in left-tail risk; Equity returns; Capital gains overhang; Cross-section analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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