Extreme Downside Risk in the Cross-Section of Asset Returns

This paper considers an extension to Ang et al.’s (2006) non-linear downside beta framework. The extreme downside risk extension counts the extreme negative stock returns conditional on the market return being extremely negative. The extension is used in double-sorted portfolios, where I control for downside beta and various other asset pricing factors and firm characteristics. I find that the cross-sectional average annual excess return between high- and low-exposure stocks is around 3.9%. The extension differentiates itself for young firms or firms that have not experienced a severe crisis, where the risk premium ranges from 2.4% to 10.4% in double sorted portfolios based on downside beta