The Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail Returns

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Shahrzadi Mahshid; FOROGHI DARIUSH; AMIRI HADI

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Paper Information

Journal: FINANCIAL RESEARCH Year:2020 | Volume:21 | Issue:4 Page(s): 593-611

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Information Journal Paper

Title

The Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail Returns

Author(s)

Shahrzadi Mahshid | FOROGHI DARIUSH | AMIRI HADI | Issue Writer Certificate

Keywords

Left tail riskQ1

Expected excess returnsQ1

Value at riskQ2

Expected shortfallQ1

Abstract

Objective: Left-tailed risk illustrates the probability of unfavorable events that could occur in a range wider than three variances of the distribution function. Although such events have a very low occurrence probability, they would cause significant losses in case of occurrence. This research aims at examining the cross-sectional effects of left-tailed risk on Expected excess returns. The present research also examines the probability of the persistence of left-tiled risk in the future. Methods: In this research two proxies of Value at risk and Expected shortfall are used to measure left-tailed risk. For this purpose, a sample of 120 companies listed in the Tehran stock market in the period of the years 2010-2017 have been selected. Research hypotheses were examined with the use of Fama and Macbeth regression. Transition matrix was used to determine the probability of left-tailed risk persistence in the future. Results: According to the findings of the research, left-tailed risk has a significant and negative effect on the Expected excess returns. The findings also suggested that the negative returns of the left tail will have a persistence probability of over 50% in the future. Conclusion: The findings of the present research illustrate a new anomaly in the financial area, which is the negative effect of left-tail risk on the Expected excess returns, and persists in the future.

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APA: Copy

Shahrzadi, Mahshid, FOROGHI, DARIUSH, & AMIRI, HADI. (2020). The Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail Returns. FINANCIAL RESEARCH, 21(4 ), 593-611. SID. https://sid.ir/paper/91261/en

Vancouver: Copy

Shahrzadi Mahshid, FOROGHI DARIUSH, AMIRI HADI. The Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail Returns. FINANCIAL RESEARCH[Internet]. 2020;21(4 ):593-611. Available from: https://sid.ir/paper/91261/en

IEEE: Copy

Mahshid Shahrzadi, DARIUSH FOROGHI, and HADI AMIRI, “The Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail Returns,” FINANCIAL RESEARCH, vol. 21, no. 4 , pp. 593–611, 2020, [Online]. Available: https://sid.ir/paper/91261/en

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