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Downside Risk

Andrew Ang¹; Joseph Chen^2,3; Yuhang Xing⁴

¹ Columbia University · ² California Southern University · ³ University of Southern California · ⁴ Rice University

Economists have long recognized that investors care differently about downside losses versus upside gains. Agents who place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements. We show that the cross section of stock returns reflects a downside risk premium of approximately 6% per annum. Stocks that covary strongly with the market during market declines have high average returns. The reward for beasring downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or by size, value, and momentum characteristics. (JEL C12, C15, C32, G12) Copyright 2006, Oxford University Press.

DOI

10.1093/rfs/hhj035

Volume

19 (4)

Pages

1191-1239

Language

en

Export

BibTeX

Sources

crossref openalex