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Chen, Steven Shu-Hsiu
Journal of international financial markets, institutions & money, July 2024, 2024-07-00, Volume: 94Journal Article
This paper investigates the international crash risk and the cross-section of stock index returns. We use the ex-ante model-free negative skewness measured by country-specific index options, proposed in Bakshi et al. (2003), as a proxy of the crash risk. We find that a country’s stock index with a high crash risk relates to a higher stock return as a risk premium across countries. The international crash risk premium exists robustly after controlling for volatility risk, macroeconomic variables, sensitivities to the international risk factors, and realized return moments. In contrast, other international risk premiums do not exist based on the exposure of such control variables. Based on the crash risk premium, we construct international stock trading strategies by sorting option-implied skewness across countries that outperform benchmark strategies by sorting the above control variables. •A strong positive relationship exists between crash risk and the cross-section of subsequent index returns across countries, indicating the existence of an international crash risk premium.•The international stock portfolio exposed to crash risk earns economically and statistically meaningful risk premiums in the cross-section.•The international crash risk premium exists robustly after controlling for common international risk sources and characteristics, including volatility risk, macroeconomic variables, sensitivities to the international risk factors, and realized return moments.•By sorting crash risk or option-implied skewness, international stock trading strategies across countries outperform benchmark strategies by sorting the above control variables.
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