2022 Volume 8, Issue 1

Nidal N.N. Darwish

Abstract

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. 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 has been selected. Research hypotheses were examined with the use of Fama and Macbeth regression. A transition matrix was used to determine the probability of left-tailed risk persistence in the future. 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.The findings of the present research illustrate a new anomaly in the financial area, which

Keywords: Left tail risk, Expected excess returns, Value at Risk, Expected shortfall