Downside Risk

Andrew Ang, Joseph Chen and Yuhang Xing

No 11824, NBER Working Papers from National Bureau of Economic Research, Inc

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 premium for downside risk. Specifically, stocks that covary strongly with the market when the market declines have high average returns. We estimate that the downside risk premium is approximately 6% per annum. The reward for bearing downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or size, book-to-market, and momentum characteristics.

JEL-codes: C12 C15 C32 G12 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-rmg
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Ang, Andrew, Joseph Chen and Yuhang Xing. "Downside Risk," Review of Financial Studies, 2006, v19(4,Winter), 1191-1239.
Published as Andrew Ang & Joseph Chen & Yuhang Xing, 2005. "Downside risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.).

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Journal Article: Downside Risk (2006)
Journal Article: Downside risk (2005)
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