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Disaster and fortune risk in asset returns

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  • Ergun, Lerby M.

Abstract

Do Disaster risk and Fortune risk fetch a premium or discount in the pricing of individual assets? Disaster risk and Fortune risk are measures for the co-movement of individual stocks with the market, given that the state of the world is extremely bad and extremely good, respectively. To address this question measures of Disaster risk and Fortune risk, derived from statistical Extreme Value Theory, are constructed. The measures are non-parametric and the number of order statistics to be used in the analysis is based on the Kolmogorov-Smirnov distance. This alleviates the problem of an arbitrarily chosen extreme region. The extreme dependence measures are used in Fama-MacBeth cross-sectional asset pricing regressions including Market, Fama-French, Liquidity and Momentum factors. I find that Disaster risk fetches a significant premium of 0.43% for the average stock.

Suggested Citation

  • Ergun, Lerby M., 2016. "Disaster and fortune risk in asset returns," LSE Research Online Documents on Economics 66194, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:66194
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    File URL: http://eprints.lse.ac.uk/66194/
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    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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