Left-tail momentum: underreaction to bad news, costly arbitrage and equity returns

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Atılgan, Yiğit and Bali, Turan G. and Demirtaş, Özgür and Günaydın, Ali Doruk (2020) Left-tail momentum: underreaction to bad news, costly arbitrage and equity returns. Journal of Financial Economics, 135 (3). pp. 725-753. ISSN 0304-405X (Print) 1879-2774 (Online)

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Abstract

This paper documents a significantly negative cross-sectional relation between left-tail risk and future returns on individual stocks trading in the U.S. and international countries. We provide a behavioral explanation to this anomaly based on the idea that investors underestimate the persistence in left-tail risk and overprice stocks with large recent losses. Thus, low returns in the left-tail of the distribution persist into the future causing left-tail return momentum. We find that the left-tail risk anomaly is stronger for stocks that are more likely to be held by retail investors, that receive less investor attention and that are costlier to arbitrage.
Item Type: Article
Uncontrolled Keywords: Left-tail risk, Momentum, Equity returns, Retail investors, Costly arbitrage, Investor inattention
Subjects: H Social Sciences > HG Finance > HG4501-6051 Investment, capital formation, speculation
Divisions: Sabancı Business School
Sabancı Business School > Accounting and Finance
Depositing User: Yiğit Atılgan
Date Deposited: 16 Aug 2021 22:26
Last Modified: 26 Apr 2022 10:24
URI: https://research.sabanciuniv.edu/id/eprint/41624

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