Crash Sensitivity and the Cross Section of Expected Stock Returns

Fousseni Chabi-Yo, Stefan Ruenzi and Florian Weigert

Journal of Financial and Quantitative Analysis, 2018, vol. 53, issue 3, 1059-1100

Abstract: This article 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 strong LTD have higher average future returns than stocks with weak LTD. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, coskewness, cokurtosis, and Kelly and Jiang’s (2014) tail risk beta. Hence, our findings are consistent with the notion that investors are crash-averse.

Date: 2018
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