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RFS Advance Access published online on March 2, 2006
Review of Financial Studies, 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

Article

Downside Risk

Andrew Ang 1 *, Joseph Chen 2, and Yuhang Xing 3
1 Columbia University and NBER, New York
2 University of Southern California
3 Rice University

* To whom correspondence should be addressed.
Andrew Ang, E-mail: aa610{at}columbia.edu


  Abstract

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 bearing 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.


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