Left-tail momentum: Underreaction to bad news, costly arbitrage and equity returns

Yigit Atilgan, Turan G. Bali, K. Ozgur Demirtas and A. Doruk Gunaydin

Journal of Financial Economics, 2020, vol. 135, issue 3, 725-753

Abstract: This paper documents a significantly negative cross-sectional relation between left-tail risk and future returns on individual stocks trading in the US and international countries. We provide a behavioral explanation to this anomaly based on the idea that investors underestimate the persistence in left-tail risk and overprice stocks with large recent losses. Thus, low returns in the left-tail of the distribution persist into the future causing left-tail return momentum. We find that the left-tail risk anomaly is stronger for stocks that are more likely to be held by retail investors, that receive less investor attention, and that are costlier to arbitrage.

Keywords: Left-tail risk; Momentum; Equity returns; Retail investors; Costly arbitrage; Investor inattention (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (73)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:135:y:2020:i:3:p:725-753

DOI: 10.1016/j.jfineco.2019.07.006

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