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RFS Advance Access originally published online on March 2, 2006
Review of Financial Studies 2006 19(4):1191-1239; doi:10.1093/rfs/hhj035
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Downside Risk

Andrew Ang
Columbia University and NBER

Joseph Chen
University of Southern California

Yuhang Xing
Rice University

Address correspondence to Andrew Ang, Columbia Business School, New York NY 10027 or e-mail: aa610{at}columbia.edu.

Economists have long recognized that investors care differently about downside losses versus upside gains. Agents who place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements. We show that the cross section of stock returns reflects a downside risk premium of approximately 6% per annum. Stocks that covary strongly with the market during market declines have high average returns. The reward for beasring downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or by size, value, and momentum characteristics. (JEL C12, C15, C32, G12)


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