How Does the Change in Left-Tail Risk Priced in China?

In this paper, we find a negative cross-sectional relationship between the change in left-tail risk and expected returns in the Chinese stock market. This effect cannot be explained by the common control variables and existing factor models in China, including the four-factor model (CH4) proposed by Liu, Stambaugh, and Yuan (2019). The predictive power of the change in left tail risk on expected returns can persist several months into the future, which may due to the strong prior beliefs of investors and the slow diffusion of fundamental information. Additionally, we observe that investors exhibit a stronger preference towards change in left-tail risk for stocks with lower capital gains overhang (CGO)