Stefan Ruenzi
Chair of International Finance
University of Mannheim

Florian Weigert
Chair of International Finance
University of Mannheim

Theory suggests that investors holding stocks with high sensitivities to extreme market downside movements demand additional compensation. Standard asset pricing models are unable to capture these extreme dependencies because they rely on the lin- ear correlation as their sole dependence measure. We show that extreme dependence structures in the form of upper and lower tail dependence are as important as linear dependence in explaining the cross-sectional variation of expected stock returns. Con- trolling for market beta, stocks with lower (upper) tail dependence have high (low) average returns. These effects are different from known market anomalies and cannot be explained by size, book-to-market, momentum, coskewness or downside beta.

• Ruenzi, S.; Weigert, F. (2011). Extreme Dependence Structures and the Cross-Section of Expected Stock Returns, Working Paper, University of Mannheim

Area: Finance

Software:

• Matlab, Stata

Links:

• http://intfin.bwl.uni-mannheim.de/31.html