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Crash Sensitivity and the Cross-Section of Expected Stock Returns

Listed author(s):
  • Chabi-Yo, Fousseni

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  • Ruenzi, Stefan

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  • Weigert, Florian

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    This paper examines whether investors receive compensation for holding crash-sensitive stocks. We capture the crash sensitivity of stocks by their lower tail dependence (LTD) with the market based on copulas. We find that stocks with weak LTD serve as a hedge during crises, but, overall, stocks with strong LTD have higher average future returns. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, coskewness, and cokurtosis. Our findings are consistent with results from the empirical option pricing literature and support the notion that investors are crash-averse.

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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1324.pdf
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    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: 56 pages
    Date of creation: Mar 2013
    Date of revision: Feb 2016
    Handle: RePEc:usg:sfwpfi:2013:24
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    Web page: http://www.unisg.ch/de/universitaet/schools/finance

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