Multivariate crash risk

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 th...

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Bibliographic Details
Published in:Journal of financial economics 2022-07, Vol.145 (1), p.129-153
Main Authors: Chabi-Yo, Fousseni, Huggenberger, Markus, Weigert, Florian
Format: Article
Language:English
Subjects:
Asset pricing
Copulas
Crash aversion
Downside risk
Lower tail dependence
Nonlinear dependence
Return on investment
Stocks
Tail risk
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.07.016