Extreme downside risk in the cross-section of asset returns

Lerby M. Ergun

International Review of Financial Analysis, 2023, vol. 90, issue C

Abstract: Extreme movements in financial markets are not always reflected equally in individual stocks. Identifying which firms are unable to absorb shocks is a challenge. This paper considers extreme downside risk, an extension to Ang et al.’s (2006) downside risk framework, and the value in separating the sensitivity between extreme and non-extreme downside risk. I find that the cross-sectional average annual excess return between high and low extreme downside exposure stocks is around 3.9%. The extension differentiates itself for young firms or firms that have not experienced a severe crisis, where the risk premium ranges from 2.4% to 10.4%.

Keywords: Asset pricing; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: C14 G11 G12 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003563

DOI: 10.1016/j.irfa.2023.102840

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