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Downside Risk

Author

Listed:
  • Andrew Ang
  • Joseph Chen
  • Yuhang Xing

Abstract

Economists have long recognized that investors care differently about downside losses versus upside gains. Agents who place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements. We show that the cross section of stock returns reflects a downside risk premium of approximately 6% per annum. Stocks that covary strongly with the market during market declines have high average returns. The reward for beasring downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or by size, value, and momentum characteristics. (JEL C12, C15, C32, G12) Copyright 2006, Oxford University Press.

Suggested Citation

  • Andrew Ang & Joseph Chen & Yuhang Xing, 2006. "Downside Risk," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1191-1239.
  • Handle: RePEc:oup:rfinst:v:19:y:2006:i:4:p:1191-1239
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    File URL: http://hdl.handle.net/10.1093/rfs/hhj035
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    • Andrew Ang & Joseph Chen & Yuhang Xing, 2005. "Downside risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.).

    References listed on IDEAS

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    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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