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Crash Sensitivity and the Cross-Section of Expected Stock Returns

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  • Ruenzi, Stefan

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  • Weigert, Florian

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    Abstract

    We examine whether investors receive a compensation for holding crash-sensitive stocks. We capture the crash sensitivity of stocks by their lower tail dependence with the market based on copulas. Stocks with strong contemporaneous crash sensitivity clearly outperform stocks with weak crash sensitivity and a trading strategy based on past crash sensitivity delivers positive abnormal returns of about 4% p.a. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, and coskewness. Our findings are consistent with results from the empirical option pricing literature and support the notion that stock market investors are crash-averse.

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    File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1324.pdf
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    Bibliographic Info

    Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1324.

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    Length: 75 pages
    Date of creation: Feb 2011
    Date of revision: Mar 2013
    Handle: RePEc:usg:sfwpfi:2013:24

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    Keywords: Asset Pricing; Asymmetric Dependence; Copulas; Crash Aversion; Downside Risk; Tail Risk;

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