Download or read book Two Essays on Extreme Downside Risk in Financial Markets written by Feng Wu and published by . This book was released on 2009 with total page 254 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Part I of this dissertation, I propose a measure for the extreme downside risk (EDR) to investigate whether bearing such a risk can be rewarded by higher expected stock returns. By constructing an EDR measure with the left tail index in the classical generalized extreme value distribution, I find a significant positive premium on firm-specific EDR in cross-section of stock returns even after I control for size, value, return reversal, momentum, and liquidity factors. EDR serves as a good indicator of extreme market plunges. High-EDR stocks generally exhibit high idiosyncratic volatility, large value-at-risk, large negative co-skewness, and high bankruptcy risk. I also controlled for these characteristics to find that the EDR premium remains robust. Furthermore, the EDR effect exhibits long-run persistence and is not subsumed by business cycles. In Part II, I apply the concept of extreme downside risk to a policy-related issue: In August 1991, NASDAQ introduced a controversial SI minimum bid price threshold as part of its listing maintenance criteria (the dollar delisting rule or one-dollar rule). This part empirically evaluates this rule through an extreme value approach. Utilizing the Generalized Extreme Value distribution model to capture extreme price plummets, I find NASDAQ stocks frequently trading below S1 in the pre-rule period are extremely vulnerable to catastrophic losses. The implementation of the one-dollar rule effectively curbs the extreme downside price movements, which helps to protect investors' interest, uphold their faith in the exchange, and improve the credibility of the market. Such a pattern is prevalent across all industries and is not affected by market movements. The S1 benchmark serves as an appropriate cutoff point in screening the issues listed on the exchange. The minimum price continued listing standard on NASDAQ is justified and has proved to be successful.