An examination of the relation between asymmetric risk measures, prior returns and expected daily stock returns

Abstract

We use a sample of individual firm stock returns over the 1988–2009 time period to determine whether: (1) expected daily returns are related to asymmetric risk measures, (2) expected daily returns are related to the directional change of the prior day's price, and (3) our results are robust to the addition of firm size, book-to-market equity and liquidity. We find that investors are compensated for asymmetric risk; however, the positive risk–return relation is present only for our smallest firm quintile. We find a short-term return reversal present in all subgroups, except for the largest firms in our sample. We also document that the low volatility anomaly may be related to firm size and liquidity.