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Multivariate crash risk

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  • Chabi-Yo, Fousseni
  • Huggenberger, Markus
  • Weigert, Florian

Abstract

This paper investigates whether multivariate crash risk (MCRASH), defined as exposure to extreme realizations of multiple systematic factors, is priced in the cross-section of expected stock returns. We derive an extended linear model with a positive premium for MCRASH, and we empirically confirm that stocks with high MCRASH earn significantly higher future returns than stocks with low MCRASH. The premium is not explained by linear factor exposures, alternative downside risk measures, or stock characteristics. Extending market-based definitions of crash risk to other well-established factors helps to determine the cross-section of expected stock returns without further expanding the factor zoo.

Suggested Citation

  • Chabi-Yo, Fousseni & Huggenberger, Markus & Weigert, Florian, 2022. "Multivariate crash risk," Journal of Financial Economics, Elsevier, vol. 145(1), pages 129-153.
    • Handle: RePEc:eee:jfinec:v:145:y:2022:i:1:p:129-153
    DOI: 10.1016/j.jfineco.2021.07.016
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    More about this item

    Keywords

    Asset pricing; Nonlinear dependence; Crash aversion; Downside risk; Tail risk; Lower tail dependence; Copulas;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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