Left-tail momentum: Underreaction to bad news, costly arbitrage and equity returns

Atılgan, Yiğit; Bali, Turan G.; Demirtaş, K. Özgür; Günaydın, A. Doruk

doi:10.1016/j.jfineco.2019.07.006

Cited by 185 publications

(71 citation statements)

References 86 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…The ratio of primary shares to the total number of shares offered in an IPO measures the proportion of offer proceeds at the issuer's disposal The heat volume zero-one dummy variable that captures hot new issues market conditions, coded one if the number of IPOs in a quarter is 50% greater than the three-monthly moving average, or else coded zero ESG-disclosing versus non-ESG-disclosing IPOs and identifies whether the differences between these two samples are statistically significant. We estimated idiosyncratic risk (Panel A of Table 1) by following Bali et al (2009), Boyer et al (2010), and Atilgan et al (2020). ε i,d denotes the regression residual of either the CAPM (Lintner, 1965;Mossin, 1966;Sharpe, 1964) or Fama-French's (1993) three-factor asset-pricing model on day d for firm i during the trading period of T days.…”

Section: Idiosyncratic Riskmentioning

confidence: 99%

ESG Disclosure and Idiosyncratic Risk in Initial Public Offerings

2021

View full text Add to dashboard Cite

Although legitimacy theory provides strong arguments that environmental, social and governance (ESG) disclosure and performance can help mitigate firm-specific (idiosyncratic) risks, this relationship has been repeatedly challenged by conceptual arguments, such as ‘transparency fallacy’ or ‘impression management’, and mixed empirical evidence. Therefore, we investigate this relationship in the revelatory case of initial public offerings (IPOs), which represent the first sale of common stock to the wider public. IPOs are characterised by strong information asymmetry between firm insiders and society, while at the same time suffering from uncertainty in firm legitimacy, culminating in amplified financial risks for both issuers and investors in aftermarket trading. Using data from the United States, we demonstrate that (1) voluntary ESG disclosure reduces idiosyncratic volatility and downside tail risk and (2) higher ESG ratings have lower associated firm-specific volatility and downside tail risk during the first year of trading in the aftermarket. We provide theoretical arguments for the relationships observed, suggesting that companies striving for ESG performance and communicating their efforts signal their compliance with sustainability-related norms, thus acquiring and upholding a societal license to operate. ESG performance and disclosure help companies build their reputation capital with investors after going public. We also report that ESG disclosure is a more consistent proxy for ex-ante uncertainty as an indicator of aftermarket risk, thereby replacing some of the more conventional measures, such as firm age, offered in the existing literature.

show abstract

Section: Idiosyncratic Riskmentioning

confidence: 99%

ESG Disclosure and Idiosyncratic Risk in Initial Public Offerings

2021

View full text Add to dashboard Cite

show abstract

“…Their results suggest that stocks with stronger lower‐tail dependence earn higher future returns. Finally, Atilgan, Bali, Demirtas, and Gunaydin (2019) measure downside risk using value‐at‐risk and expected a shortfall and uncover a negative relation between these metrics and future equity returns.…”

Section: Introductionmentioning

confidence: 99%

Downside beta and the cross section of equity returns: A decade later

Atılgan

Demirtaş

Günaydın

2020

Euro Fin Management

Self Cite

View full text Add to dashboard Cite

This study reexamines the relation between downside beta and equity returns in the United States. First, we replicate the 2006 work of Ang, Chen, and Xing who find a positive relation between downside beta and future equity returns for equal‐weighted portfolios of NYSE stocks. We show that this relation doesn't hold after using value‐weighted returns or controlling for various return determinants. We also extend the original sample, add AMEX/NASDAQ stocks or utilize alternative downside beta measures and still find no downside risk premium. We focus on factor analysis results, persistence of downside beta, and various subsamples to understand the economic reasons behind the findings.

show abstract

“…Therefore, the suspension of price reflection essentially "shortens" the reaction time of last news, which contributes to the "speed-up" effect in this situation. Hence, in the first situation, tail risks might not be perfectly captured by the expected shortfall or VaR that functions well in the US market (Atilgan et al, 2019). Instead, the maximum drawdown does a better job by virtue of capturing the risk of long-term price adjustment.…”

Section: Introductionmentioning

confidence: 99%

“…However, a surge of literature provide the evidence suggesting the linkage between the idiosyncratic risk and asset performance (Ang et al, 2006(Ang et al, , 2009Fu, 2009;Stambaugh et al, 2015;Gu et al, 2018), although some of their findings are mixed. The relation between idiosyncratic risk and expected returns, if any, is expected to be positive in classical paradigm, while a growing body of literature have recognized a negative relation between them (Stambaugh et al, 2015;Atilgan et al, 2019). And this may provide new thought or solution to the enhancement of profitability related to the combination of different firm-specific characteristics.…”

Section: Introductionmentioning

confidence: 99%

“…Following Atilgan et al (2019), we consider the idiosyncratic VaR and idiosyncratic expected shortfall as the proxies of idiosyncratic tail risks (IVaR and IES, hereafter) in our work. Additionally, it is straightforward to consider the idiosyncratic maximum drawdown (IMD) as one of the idiosyncratic tail risk metrics for the Chinese stock market.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Weekly Idiosyncratic Risk Metrics and Idiosyncratic Momentum: Evidence from the Chinese Stock Market

Shi

Zhou

2019

SSRN Journal

View full text Add to dashboard Cite

This paper focuses on the weekly idiosyncratic momentum (IMOM) as well as its risk-adjusted versions with respect to various idiosyncratic risk metrics. Using the A-share individual stocks in the Chinese market from January 1997 to December 2017, we first evaluate the performance of the weekly momentum and idiosyncratic momentum based on raw returns and idiosyncratic returns, respectively. After that the univariate portfolio analysis is conducted to investigate the return predictability with respect to various idiosyncratic risk metrics. Further, we perform a comparative study on the performance of the IMOM portfolios with respect to various risk metrics. At last, we explore the possible explanations to the IMOM as well as risk-based IMOM portfolios. We find that 1) there is a prevailing contrarian effect and a IMOM effect for the whole sample; 2) a negative relation exists between most of the idiosyncratic risk metrics and the cross-sectional returns, and better performance is found that is linked to idiosyncratic volatility (IVol) and maximum drawdowns (IMDs); 3) additionally, the IVol-based and IMD-based IMOM portfolios exhibit a better explanatory power to the IMOM portfolios with respect to other risk metrics; 4) finally, higher profitability of the IMOM as well as IVol-based and IMD-based IMOM portfolios is found to be related to upside market states, high levels of liquidity and high levels of investor sentiment. (Wei-Xing Zhou) 1 Literature regarding the momentum (contrarian) effect are abundant, and Asness et al. (2013) conduct the comprehensive research on crosssectional momentum effect.

show abstract

Left-tail momentum: Underreaction to bad news, costly arbitrage and equity returns

Cited by 185 publications

References 86 publications

ESG Disclosure and Idiosyncratic Risk in Initial Public Offerings

ESG Disclosure and Idiosyncratic Risk in Initial Public Offerings

Downside beta and the cross section of equity returns: A decade later

Weekly Idiosyncratic Risk Metrics and Idiosyncratic Momentum: Evidence from the Chinese Stock Market

Contact Info

Product

Resources

About