Analysis of the Persistence of the Negative Relationship between Downside Risk and Expected Excess Returns in Future

Abstract

AbstractIn risky situations, people's behavioral biases may lead them to deviate from rational decisions leading to a negative relationship anomaly between risk and return. Investors underreact the stock with a recently negative return (exposed to downside risk) resulting in a negative return momentum or the persistence of downside risk in future. In the present study, the negative relationship anomaly between the downside risk and the expected excess return is investigated. Also, the exploration of the relation of firm-specific characteristics and other risk measures with downside risk is investigated for the accurate explanation of the anomaly. In addition, the persistence of downside risk and the relationship between the amount of downside risk and persistence severity are investigated.

Keywords

• usual downside risk
• unusual downside risk
• expected excess return
• idiosyncratic volatility