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Crash Aversion and the Cross-Section of Expected Stock Returns Worldwide

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  • Florian Weigert

Abstract

This paper examines whether investors receive compensation for holding stocks with a strong sensitivity to extreme market downturns in a sample covering forty countries. Worldwide, stocks with strong crash sensitivity deliver average returns of more than 7% p.a. higher than stocks with weak crash sensitivity. The effect is robust across geographical subsamples and is not explained by systematic risk factors and alternative firm characteristics. I show that the risk premium is particularly pronounced in countries that display negative market skewness, high income per capita, and rank high on Hofstede’s individualism index.Received July 2, 2015; accepted November 20, 2015 by Editor Raman Uppal.

Suggested Citation

  • Florian Weigert, 2016. "Crash Aversion and the Cross-Section of Expected Stock Returns Worldwide," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 6(1), pages 135-178.
    • Handle: RePEc:oup:rasset:v:6:y:2016:i:1:p:135-178.
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    File URL: http://hdl.handle.net/10.1093/rapstu/rav019
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    Citations

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    Cited by:

    1. Ruenzi, Stefan & Weigert, Florian, 2018. "Momentum and crash sensitivity," Economics Letters, Elsevier, vol. 165(C), pages 77-81.
    2. Ruenzi, Stefan & Ungeheuer, Michael & Weigert, Florian, 2020. "Joint Extreme events in equity returns and liquidity and their cross-sectional pricing implications," Journal of Banking & Finance, Elsevier, vol. 115(C).
    3. Alcock, Jamie & Sinagl, Petra, 2022. "International determinants of asymmetric dependence in investment returns," Journal of International Money and Finance, Elsevier, vol. 122(C).
    4. Chabi-Yo, Fousseni & Huggenberger, Markus & Weigert, Florian, 2022. "Multivariate crash risk," Journal of Financial Economics, Elsevier, vol. 145(1), pages 129-153.
    5. Mohammad Q. M. Momani, 2018. "Revisiting the momentum factor in the U.K. stock market," Economics Bulletin, AccessEcon, vol. 38(1), pages 528-531.
    6. Zaremba, Adam & Cakici, Nusret & Demir, Ender & Long, Huaigang, 2022. "When bad news is good news: Geopolitical risk and the cross-section of emerging market stock returns," Journal of Financial Stability, Elsevier, vol. 58(C).
    7. Ergun, Lerby M., 2023. "Extreme downside risk in the cross-section of asset returns," International Review of Financial Analysis, Elsevier, vol. 90(C).
    8. Harris, Richard D.F. & Nguyen, Linh H. & Stoja, Evarist, 2019. "Systematic extreme downside risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 128-142.
    9. Lee, Kuan-Hui & Yang, Cheol-Won, 2022. "The world price of tail risk," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).

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