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Extreme downside risk in the cross-section of asset returns

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  • Ergun, Lerby M.
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%.

Suggested Citation

  • Ergun, Lerby M., 2023. "Extreme downside risk in the cross-section of asset returns," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003563
    DOI: 10.1016/j.irfa.2023.102840
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    Keywords

    Asset pricing; Econometric and statistical methods;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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