University of TehranFinancial Research Journal1024-815321420200220The Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail ReturnsThe Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail Returns5936117555710.22059/frj.2019.282102.1006873FAMahshidShahrzadiPh.D. Candidate, Department of Accounting, Faculty of Administrate and Economic, University of Isfahan, Iran.DariushForoghiAssociate Prof., Department of Accounting, Faculty of Administrate and Economic, University of Isfahan, Isfahan, Iran.HadiAmiriAssistant Prof., Department of Economic, Faculty of Administrate and Economic, University of Isfahan, Isfahan, Iran.Journal Article20190525Objective: Left-tailed risk illustrates the probability of unfavorable events that could occur in a range wider than three variances of the distribution function. Although such events have a very low occurrence probability, they would cause significant losses in case of occurrence. This research aims at examining the cross-sectional effects of left-tailed risk on expected excess returns. The present research also examines the probability of the persistence of left-tiled risk in the future.<br />Methods: In this research two proxies of value at risk and expected shortfall are used to measure left-tailed risk. For this purpose, a sample of 120 companies listed in the Tehran stock market in the period of the years 2010-2017 have been selected. Research hypotheses were examined with the use of Fama and Macbeth regression. Transition matrix was used to determine the probability of left-tailed risk persistence in the future.<br />Results: According to the findings of the research, left-tailed risk has a significant and negative effect on the expected excess returns. The findings also suggested that the negative returns of the left tail will have a persistence probability of over 50% in the future.<br />Conclusion: The findings of the present research illustrate a new anomaly in the financial area, which is the negative effect of left-tail risk on the expected excess returns, and persists in the future.Objective: Left-tailed risk illustrates the probability of unfavorable events that could occur in a range wider than three variances of the distribution function. Although such events have a very low occurrence probability, they would cause significant losses in case of occurrence. This research aims at examining the cross-sectional effects of left-tailed risk on expected excess returns. The present research also examines the probability of the persistence of left-tiled risk in the future.<br />Methods: In this research two proxies of value at risk and expected shortfall are used to measure left-tailed risk. For this purpose, a sample of 120 companies listed in the Tehran stock market in the period of the years 2010-2017 have been selected. Research hypotheses were examined with the use of Fama and Macbeth regression. Transition matrix was used to determine the probability of left-tailed risk persistence in the future.<br />Results: According to the findings of the research, left-tailed risk has a significant and negative effect on the expected excess returns. The findings also suggested that the negative returns of the left tail will have a persistence probability of over 50% in the future.<br />Conclusion: The findings of the present research illustrate a new anomaly in the financial area, which is the negative effect of left-tail risk on the expected excess returns, and persists in the future.https://jfr.ut.ac.ir/article_75557_24d8ec28afe42e1fd2d61a1691e85fe4.pdf