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Downside Risk and the Momentum Effect

Listed author(s):
  • Andrew Ang
  • Joseph Chen
  • Yuhang Xing

Stocks with greater downside risk, which is measured by higher correlations conditional on downside moves of the market, have higher returns. After controlling for the market beta, the size effect and the book-to-market effect, the average rate of return on stocks with the greatest downside risk exceeds the average rate of return on stocks with the least downside risk by 6.55% per annum. Downside risk is important for explaining the cross-section of expected returns. In particular of the profitability of investing in momentum strategies can be explained as compensation for bearing high exposure to downside risk.

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File URL: http://www.nber.org/papers/w8643.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8643.

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Date of creation: Dec 2001
Publication status: published as Ang, Andrew, Joe Chen and Yuhang Xing. “Downside Risk." Review of Financial Studies 19 (2006): 1191-1239.
Handle: RePEc:nbr:nberwo:8643
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