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Journal articles (2022), Finance, In press

Valuing downside risk on international stock markets


Recent and growing asset pricing literature identifies downside risk factors in an economy where the representative investor has generalized disappointment aversion (GDA) preferences. We investigate and find that global GDA factors are statistically significant sources of risk in international stock markets. Nevertheless, other sources of risk, such as skewness and cokurtosis, are still relevant in the presence of global GDA factor risks. Our results survive several robustness checks. The GDA asset pricing theory is empirically validated globally as each global GDA factor risk premium estimate has the theoretically predicted sign. Furthermore, long-short portfolio strategies based on sorting countries on financial indicators such as digital payment or financial inclusion generate significantly sizeable risk premia mainly driven by their global downstate component. It is also the case when sorting countries on economic indicators such as per capita gross domestic product, ease of doing business, or country competitiveness. Link to the article

HIKOUATCHA, P. and TÉDONGAP, R. (2022). Valuing downside risk on international stock markets. Finance, In press.

Keywords : #General-Disappointment-Aversion, #Downside-risk, #International-Asset-Pricing, #Covid, #19