Downside risk and stock returns in the G7 countries: An empirical analysis of their long-run and short-run dynamics

Cathy Yi-Hsuan Chen, Thomas C. Chiang and Wolfgang Härdle

Journal of Banking & Finance, 2018, vol. 93, issue C, 21-32

Abstract: Any risk-return tradeoff analysis in aggregate equity markets relies on appropriate measures of risk, in most studies based on (co-)variance relations. Consequently, in integrated global markets, country-specific expected return is priced with a world price of covariance risk. This study relates domestic excess stock returns to the world downside risk. Evidence shows that downside tail risk (as a multiplier of volatility) has long memory cointegration properties; hence, the underlying risk aversion behavior in an integrated market is associated with the conditional quantile ratio, the correlation of stock returns, and the cointegrating coefficient of downside risk. Our empirical results based on G7 countries indicate that investors are averse to downside risk, which via Cornish–Fisher expansions is related to higher moment risk and interpretable in a utility-based decision framework.

Keywords: Downside risk; Value-at-risk; Long memory; Fractional integration; Risk-return; Market integration (search for similar items in EconPapers)
JEL-codes: C24 F30 G11 G12 G15 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426618301122
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:93:y:2018:i:c:p:21-32

DOI: 10.1016/j.jbankfin.2018.05.012

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().