Research On The Prediction Of Left Tail Risk On Stock Expected Return

At present,the world’s geopolitical conflicts are frequent and escalated,and the public health crisis such as COVID-19 has not subsided.These extreme tail events have brought varying degrees of impact on the real economy and capital markets all over the world.While China’s capital market is gradually in line with the international financial system,the phenomenon of tail risk in China’s capital market is also common.Tail risk has an important practical impact on the stable development of global stock markets and the growth of investors’ wealth.Therefore,a correct understanding of tail risk and its relationship with asset return is of great significance in investment decision-making and risk management.In order to measure the extreme deviation degree of China’s stock price,based on the daily data at the individual stock level,this paper introduces the second-order lower partial moment method to measure the left tail risk of assets,and focuses on the pricing effect of the left tail risk distributed on the left of the benchmark reference level on the expected return of China’s stock.Firstly,using portfolio spread analysis and Fama-Macbeth cross-section regression,this paper intuitively analyzes the pricing effect of left tail risk on stock expected return;Secondly,from the perspective of the persistence of left tail risk,institutional shareholding,investor sentiment and short selling constraints,we further analyzes the impact of left tail risk on the expected return of stocks under the conditions of different institutional shareholding ratio,different investor sentiment level and short selling constraints.Finally,we test the robustness of the relationship between the left tail risk and the expected return of assets.The empirical study of this paper finds that in the A-share market,there is a negative prediction effect between the left tail risk at the individual stock level measured by the second-order lower partial moment and the expected return of the stock cross section.The negative relationship is persistent and can not be explained by the common control variables and factor models.This abnormal negative relationship is contrary to the theory of "Risk return equilibrium",which is called "Low-risk anomaly".Further research found that in the period of high investor sentiment,irrational investors have left tail risk preference,which leads to a stronger low-risk anomaly in the left tail.In the period of low sentiment,the market tends to be rational,which helps to weaken the mispricing of left tail risk.In addition,the trading mechanism that allows short selling also helps to curb the negative premium of left tail risk.However,the negative premium effect of stock left tail risk has no significant difference under different institutional ownership levels,which may be related to the rational negligence of institutional investors in China’s stock market and their trading activity is not as active as individual investors.Through the robustness test,it is found that after excluding the influence of shell value polluting stocks,the low-risk anomaly of the left tail still exists,and the anomaly is more intense in the GEM market.The stocks in the extreme right tail event have the characteristics of lottery like,and also show a similar negative effect,but the negative effect can be fully explained by the maximum daily return(MAX).