Zhongjin Lu and
Journal of Financial Economics, 2019, vol. 131, issue 3, 736-760
We test whether bear market risk, time variation in the probability of future bear market states, is priced. We construct an Arrow–Debreu security that pays off in bear market states (AD Bear) from traded Standard & Poor’s (S&P) 500 index options and use its returns to measure bear market risk. We find that bear beta (exposure to bear market risk) has a strong relation with expected stock returns that is robust, persistent, and remains strong among liquid and large stocks. Historical bear beta also predicts future bear market risk exposure. We conclude that bear market risk is priced in the cross section of stock returns.
Keywords: Arrow–Debreu state prices; Bear beta; Bear market risk; Downside risk; Factor models (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G17 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:131:y:2019:i:3:p:736-760
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