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Multivariate Crash Risk

Author

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  • Fousseni Chabi-Yo
  • Markus Huggenberger
  • Florian Weigert

Abstract

This paper investigates whether multivariate crash risk is priced in the crosssection of expected stock returns. Motivated by a theoretical asset pricing model, we capture the multivariate crash risk of a stock by a combined measure based on its expected shortfall and its multivariate lower tail dependence with the systematic risk factors of the Carhart (1997) model. We find that stocks with a high exposure to joint crashes of the market and the momentum factor bear a risk premium which is not explained by traditional linear factor models or by other downside risk measures. Our results indicate that accounting for the multivariate crash risk of established state variables helps to understand the cross-section of expected stock returns without further expanding the factor zoo.

Suggested Citation

  • Fousseni Chabi-Yo & Markus Huggenberger & Florian Weigert, 2019. "Multivariate Crash Risk," Working Papers on Finance 1901, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2019:01
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    Cited by:

    1. Supper, Hendrik & Irresberger, Felix & Weiß, Gregor, 2020. "A comparison of tail dependence estimators," European Journal of Operational Research, Elsevier, vol. 284(2), pages 728-742.

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    More about this item

    Keywords

    Asset pricing; Non-linear dependence; Copulas; Crash aversion; Downside risk; Lower tail dependence; Tail risk;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • 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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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