Value at Risk and Expected Stock Returns

Posted: 7 May 2004

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Nusret Cakici

Fordham university

Abstract

Stock size, liquidity, and value at risk (VAR) can explain the cross-sectional variation in expected returns, but market beta and total volatility have almost no power to capture the cross-section of expected returns at the stock level. Furthermore, the strong positive relationship between average returns and VAR is robust for different investment horizons and loss-probability levels. In addition to the cross-sectional regressions at the stock level, this study used a time-series approach to test the empirical performance of VAR at the portfolio level. The results, based on 25 size/book-to-market portfolios, indicate that VAR has additional explanatory power after the characteristics of market return, size, book-to-market ratio, and liquidity are controlled for.

Keywords: Equity Investments: Fundamental Analysis and Valuation Models; Portfolio Management: Equity Strategies; Risk Measurement and Management: Equity Portfolios

Suggested Citation

Bali, Turan G. and Cakici, Nusret, Value at Risk and Expected Stock Returns. Financial Analysts Journal, Vol. 60, No. 2, pp. 57-73, March/April 2004, Available at SSRN: https://ssrn.com/abstract=541062

Turan G. Bali (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Nusret Cakici

Fordham university ( email )

113 West 60th Street
New York, NY 10023
United States
2017473227 (Phone)
07446 (Fax)

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