Extreme Downside Risk and Expected Stock Returns

摘要

We construct the extreme downside risk (EDR) measure of a stock with the maximum likelihood estimation of the left tail index in the classical generalized extreme value distribution. We find a significant positive premium on EDR in cross-section of stock returns even after controlling for firm size, book-to-market ratio, return reversal, momentum, and liquidity effects. EDR serves as a good indicator of extreme market downside movements. Small stocks and value stocks on average expose to higher EDR. In addition, we also find high-EDR stocks generally exhibit high idiosyncratic volatility, large negative co-skewness, and high bankruptcy risk. However, the significance of positive EDR premium remains robust even after controlling for these effects.