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Discrete Dynamics in Nature and Society
Volume 2015, Article ID 980768, 17 pages
http://dx.doi.org/10.1155/2015/980768
Research Article

The Risk of Individual Stocks’ Tail Dependence with the Market and Its Effect on Stock Returns

1School of Statistics & Collaborative Innovative Center of Financial Security, Southwest University of Finance and Economics, Chengdu 611130, China
2Aix-Marseille School of Economics, Aix-Marseille University, CNRS & EHESS, 2 rue de la Charité, 13002 Marseille, France
3Cardiff Business School, Cardiff University, C26 Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK
4School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 610054, China

Received 28 May 2015; Accepted 22 October 2015

Academic Editor: Gian I. Bischi

Copyright © 2015 Guobin Fan et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Traditional beta is only a linear measure of overall market risk and places equal emphasis on upside and downside risks, but actually the latter is always much stronger probably due to the trading mechanism like short-sale constraints. Therefore, this paper employs the nonlinear measure, tail dependence, to measure the extreme downside risks that individual stocks crash together with the whole market and investigates whether such tail dependence risks will affect stock returns. Our empirical evidence based on Shanghai A shares confirms that most stocks display nonnegligible tail dependence with the whole market, and, more importantly, such tail dependence risks can indeed provide additional information beyond beta and other factors for asset pricing. In cross-sectional regression, it is proved that this tail dependence does help to explain monthly returns on Shanghai A shares, whereas the time-series regression further indicates that mimicking portfolio returns for tail dependence can capture strong common variation of Shanghai A stock returns.