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Crash risk in the Nordic Stock Market - a cross-sectional analysis

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  • Fjærvik, Thomas

    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

This paper takes the viewpoint of an investor that can invest in the Nordic countries Norway, Sweden, Denmark and Finland. The four markets are treated as one integrated market. In the analysis we investigate whether there exists a risk premium for investing in stocks exhibiting high crash risk, as measured by their lower tail dependence with the rest of the market portfolio. We indeed find evidence that this is the case, and this evidence is in line with previous research done on American and German stocks markets, as well as theoretical predictions in the literature. However, the results are less clear than was the case for the abovementioned markets. Lower tail dependence is estimated using convex combinations of copulas exhibiting different tail dependence characteristics. The results are robust to different portfolio formations and copula selection criteria.

Suggested Citation

  • Fjærvik, Thomas, 2023. "Crash risk in the Nordic Stock Market - a cross-sectional analysis," Discussion Papers 2023/5, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2023_005
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    References listed on IDEAS

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    More about this item

    Keywords

    Crash risk premium; copulas; Pearson correlation;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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