The Impact of Asymmetry on Expected Stock Returns: An Investigation of Alternative Risk Measures

This study analyzes the impact of liquidity risk on stock returns in four Latin American markets (Chile, Columbia, Mexico, and Peru) between January 1998 and July 2018. Several previous studies have focused on measuring this effect in developed markets and a few in emerging markets, such as Latin American stock markets. In the present study, five liquidity risk measures with a multiple regression model; three have been widely used in previous studies and two were from recently proposed measures. We found evidence of an inverse relationship between liquidity risk and stock performance, which indicates that there exist rewards for investing in less liquid positions and therefore originate new investment strategies. In general, lesser developed or smaller markets have a disadvantage for this type of study, due to lack of access to historical information on stock purchase and sales.

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Stock returns and liquidity risk in Chile

Dimensión Empresarial ◽

10.15665/dem.v17i2.1927 ◽

2019 ◽

Vol 17 (2) ◽

Author(s):

Francisco Javier Vásquez-Tejos ◽

Hernán Pape-Larre ◽

Juan Martín Ireta-Sánchez

Keyword(s):

Stock Market ◽

Emerging Markets ◽

Regression Model ◽

Stock Returns ◽

Multiple Regression ◽

Risk Measures ◽

Liquidity Risk ◽

Multiple Regression Model ◽

Developed Markets ◽

The Impact

This study analyzes the impact of liquidity risk on the return of shares in the Chilean stock market, during the period from January 2000 to July 2018. A large number of studies have focused on measuring this effect in developed markets and few in emerging markets, especially the Chilean one. To do this, we used 6 risk measures in a multiple regression model; four widely used in previous studies and two new proposed measures. We found evidence of the significance of the liquidity risk over the stock return.RESUMENEste estudio analiza el impacto del riesgo de liquidez sobre el retorno de las acciones en el mercado bursátil chileno, durante el periodo de enero de 2000 hasta julio de 2018. Gran cantidad de estudios se han centrado en medir este efecto en los mercados desarrollados y pocos en mercados emergentes, especialmente el chileno. Para ello, se utilizó un modelo de regresión múltiple 6 medidas de riesgo; cuatro utilizadas ampliamente en estudios anteriores y dos medidas nuevas propuestas. Encontramos evidencia de significancia del riesgo de liquidez sobre el retorno accionario.RESUMOEste estudo analisa o impacto do risco de liquidez no retorno das ações no mercado de ações chileno, durante o período de janeiro de 2000 a julho de 2018. Muitos estudos têm se concentrado em medir este efeito em mercados desenvolvidos e poucos nos mercados emergentes, especialmente o chileno. Para isso, utilizamos 6 medidas de risco em um modelo de regressão múltipla; quatro amplamente utilizados em estudos anteriores e duas novas medidas propostas. Encontramos evidências da significância do risco de liquidez sobre o retorno das ações.

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Is There an Intertemporal Relation between Downside Risk and Expected Returns?

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109009990159 ◽

2009 ◽

Vol 44 (4) ◽

pp. 883-909 ◽

Cited By ~ 159

Author(s):

Turan G. Bali ◽

K. Ozgur Demirtas ◽

Haim Levy

Keyword(s):

Stock Returns ◽

Value At Risk ◽

Risk Measures ◽

Downside Risk ◽

Expected Returns ◽

Significant Relation ◽

Macroeconomic Variables ◽

Portfolio Returns ◽

Risk Return ◽

Expected Stock Returns

AbstractThis paper examines the intertemporal relation between downside risk and expected stock returns. Value at Risk (VaR), expected shortfall, and tail risk are used as measures of downside risk to determine the existence and significance of a risk-return tradeoff. We find a positive and significant relation between downside risk and the portfolio returns on NYSE/AMEX/Nasdaq stocks. VaR remains a superior measure of risk when compared with the traditional risk measures. These results are robust across different stock market indices, different measures of downside risk, loss probability levels, and after controlling for macroeconomic variables and volatility over different holding periods as originally proposed by Harrison and Zhang (1999).

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The Impact of Upside and Downside Risk on Expected Stock Returns: Across Firm Size and Value Measures

SSRN Electronic Journal ◽

10.2139/ssrn.1924048 ◽

2011 ◽

Author(s):

Stephen P. Huffman ◽

Cliff Moll

Keyword(s):

Stock Returns ◽

Firm Size ◽

Downside Risk ◽

Expected Stock Returns ◽

The Impact

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Liquidity Risk and Asset Pricing in Pakistan Stock Exchange

Journal of Independent Studies and Research Management Social Science and Economics ◽

10.31384/jisrmsse/2021.19.1.4 ◽

2021 ◽

Vol 19 (1) ◽

Keyword(s):

Asset Pricing ◽

Stock Returns ◽

Stock Exchange ◽

Risk Measures ◽

Liquidity Risk ◽

Excess Returns ◽

Market Conditions ◽

Bear Market ◽

Market Trends ◽

The Impact

This paper empirically investigates the impact of liquidity risk on stock returns in Pakistan and determines investors' attitude under bull and bear market conditions. Specifically, the liquidity adjusted capital asset pricing model(CAPM) is modified by including the interaction between the liquidity risk and the indicators of bull- and bear-market periods to investigate whether the pricing of liquidity risk differs in both upward and downward market trends. The analysis is carried out for a large panel of Pakistani manufacturing firms listed at the Pakistan Stock Exchange for the period January 2000 – December 2015. We use alternative liquidity risk measures to check the robustness of the liquidity risk effect. We observe that higher liquidity risk yields higher excess stock returns, implying pricing of liquidity risk during the examined period. The results also reveal that the liquidity risk is positively and significantly related to excess returns in the high-liquidity-risk beta portfolios, whereas it is negatively or insignificantly related to excess returns of low-liquidity-risk beta portfolios. The results also provide evidence that stocks affected by liquidity risk yield positive expected returns in both bull and bear market conditions. However, we find significant differences in the pricing of liquidity risk under upward and downward market trends. The robustness check confirms that the findings on the pricing of liquidity risk are not driven by any specific measure of liquidity.

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Firm websites and the risk of firm

Industrial Management & Data Systems ◽

10.1108/imds-09-2014-0276 ◽

2015 ◽

Vol 115 (3) ◽

pp. 504-520 ◽

Cited By ~ 2

Author(s):

Yu-Tai Chien ◽

Hsin-Min Lu

Keyword(s):

Information Asymmetry ◽

Stock Returns ◽

Information Disclosure ◽

Web Site ◽

Risk Measures ◽

Cross Sectional Study ◽

Firm Risk ◽

Cross Sectional ◽

Content Type ◽

The Impact

Purpose – Websites have become an important channel for firms to communicate with their stakeholders. Higher web site traffic could represent effective information disclosure and higher investor recognition. Both may reduce the risk of firm by reducing the level of information asymmetry and facilitating a more complete market by reaching to more potential investors. The purpose of this paper is to investigate the impact of firm web site traffic to the risk of firm. Design/methodology/approach – The authors conducted a cross-sectional study on the risk and firm web site traffic data of 4,122 US public firms. Findings – After controlling for confounding factors, web site traffic is significantly negatively associated with three firm risk measures: cost of equity, return volatility, and analyst forecast dispersion. Originality/value – The results provide new insights to the economic impact of web site traffic. Compared with previous studies that mostly investigated the relationships between web site traffic and firm performance measured by stock returns or company profitability, the authors documented empirical evidence that web site traffic influences the risk of firm through the level of information asymmetry and investor recognition. This paper suggests that when valuing a firm, investors would take web site traffic into consideration. Firm managers could use firm Websites as a channel to reduce information asymmetry, and increase investor recognition that can contribute to the firm’s value through reduced risk.

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Crash Sensitivity and the Cross Section of Expected Stock Returns

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109018000121 ◽

2018 ◽

Vol 53 (3) ◽

pp. 1059-1100 ◽

Cited By ~ 45

Author(s):

Fousseni Chabi-Yo ◽

Stefan Ruenzi ◽

Florian Weigert

Keyword(s):

Risk Factors ◽

Stock Returns ◽

Cross Section ◽

Tail Dependence ◽

Lower Tail ◽

Tail Risk ◽

Expected Stock Returns ◽

The Cross ◽

Traditional Risk Factors ◽

The Impact

This article examines whether investors receive compensation for holding crash-sensitive stocks. We capture the crash sensitivity of stocks by their lower-tail dependence (LTD) with the market based on copulas. We find that stocks with strong LTD have higher average future returns than stocks with weak LTD. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, coskewness, cokurtosis, and Kelly and Jiang’s (2014) tail risk beta. Hence, our findings are consistent with the notion that investors are crash-averse.

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