Tail risks, firm characteristics, and stock returns

Abstract

We focus on the left-tail (right-tail) risk of stocks, that is, the huge losses (gains) of financial assets with a small probability. The empirical results mainly reveal that both the left and the right tail risks of stocks in the Chinese market are negatively related to their one-month-ahead returns and Chinese investor is prone to chase winners. Moreover, the tail risk effect is more pronounced in stocks with more retail investors, less investor attention, and more transparency. Finally, we show that prospect theory and salience theory fail to capture the left tail effect, while the right tail effect is consistent with these theories.