Working Paper: NBER ID: w8643
Authors: Andrew Ang; Joseph Chen; Yuhang Xing
Abstract: Stocks with greater downside risk, which is measured by higher correlations conditional on downside moves of the market, have higher returns. After controlling for the market beta, the size effect and the book-to-market effect, the average rate of return on stocks with the greatest downside risk exceeds the average rate of return on stocks with the least downside risk by 6.55% per annum. Downside risk is important for explaining the cross-section of expected returns. In particular of the profitability of investing in momentum strategies can be explained as compensation for bearing high exposure to downside risk.
Keywords: No keywords provided
JEL Codes: C12; C15; C32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher downside risk (D81) | higher expected returns (G12) |
| downside risk factor (G41) | higher expected returns (G12) |
| portfolio of high downside risk stocks (G11) | outperforms portfolio of low downside risk stocks (G11) |
| momentum strategies profitability (L21) | compensation for high exposure to downside risk (G11) |
| downside risk measure (D81) | captures asymmetric effects of risk (D81) |