Global downside risk and equity returns
Atılgan, Yiğit and Bali, Turan G. and Demirtaş, Özgür and Günaydın, Ali Doruk (2019) Global downside risk and equity returns. Journal of International Money and Finance, 98 . ISSN 0261-5606 (Print) 1873-0639 (Online)
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Official URL: http://dx.doi.org/10.1016/j.jimonfin.2019.102065
This paper reexamines the relation between various downside risk measures and future equity returns in a global context that spans 26 developed markets. We find that there is no significantly positive relation between systematic downside risk and the cross-section of equity returns, and in fact, this relation is mostly negative. Moreover, stock-specific risk measures such as lower partial moment or extreme left tail risk measures such as value-at-risk and expected shortfall have a negative predictive relation with future equity returns. These negative relations are weaker but still observable for value-weighted portfolios. Focusing on additional test assets indicates a significantly negative relation between downside risk and future returns at the portfolio level whereas this relation is flat at the equity index level.
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