Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

Abstract: This paper takes the viewpoint of an investor that can invest in the Nordic countries Norway, Sweden, Denmark and Finland. The four markets are treated as one integrated market. In the analysis we investigate whether there exists a risk premium for investing in stocks exhibiting high crash risk, as measured by their lower tail dependence with the rest of the market portfolio. We indeed find evidence that this is the case, and this evidence is in line with previous research done on American and German stocks markets, as well as theoretical predictions in the literature. However, the results are less clear than was the case for the abovementioned markets. Lower tail dependence is estimated using convex combinations of copulas exhibiting different tail dependence characteristics. The results are robust to different portfolio formations and copula selection criteria.

Keywords: Crash risk premium; copulas; Pearson correlation

JEL-codes: G00; G01; G11; G12

Language: English

40 pages, April 28, 2023

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