How is the change in left-tail risk priced in China?

Kaisi Sun, Hui Wang and Yifeng Zhu

Pacific-Basin Finance Journal, 2022, vol. 71, issue C

Abstract: In this paper, we find a negative cross-sectional relationship between the change in left-tail risk and expected returns in the Chinese stock market. This effect cannot be explained by the common control variables and existing factor models in China, including the four-factor model (CH4) proposed by Liu, Stambaugh, and Yuan (2019). The predictive power of the change in left tail risk on expected returns can persist several months into the future, which may due to the strong prior beliefs of investors and the slow diffusion of fundamental information. Additionally, we observe that investors exhibit a stronger preference toward change in left-tail risk for stocks with lower capital gains overhang (CGO).

Keywords: Change in left-tail risk; Equity returns; Capital gains overhang; Cross-section analysis (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21002109

DOI: 10.1016/j.pacfin.2021.101703

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