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http://dx.doi.org/10.5392/JKCA.2021.21.11.320

Left-tail Risk and Expected Stock Returns in the Korean Stock Market  

Cheon, Yong-Ho (인천대학교 경영학부)
Ban, Ju-Il (상명대학교 글로벌경영학과)
Publication Information
The Journal of the Korea Contents Association / v.21, no.11, 2021 , pp. 320-332 More about this Journal
Abstract
This paper investigates the influence of stock-level left-tail risk, which is defined using Value-at-Risk(VaR) estimates of past one-year daily stock returns, in the expected stock returns in the Korean stock market. Our results are summarized as follows: First, monthly-constructed zero-cost portfolios that buy (shortsell) the highest (lowest) left-tail risk decile in the previous month exhibit an average monthly return (called left-tail risk premium) of -2.29%. Second, Fama-MacBeth cross-sectional regressions suggest that left-tail risk in the previous month shows significant and negative explanatory power over return in this month, after controlling for various firm characteristics such as firm size, B/M, market beta, liquidity, maximum daily return, idiosyncratic volatility, and skewness. Third, the stocks with larger recent month loss have lower returns in the next month. Fourth, the magnitude of left-tail risk premium is negatively related with lagged market-level volatility. These results support the hypothesis from a perspective of behavioral finance that the overpricing of stocks with left-tail risk is attributed to the investors' underreaction to it.
Keywords
Left-tail Risk; Expected Stock Returns; Underreaction; Behavioral Bias; Overpricing; Market Volatility;
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Times Cited By KSCI : 2  (Citation Analysis)
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