Cyber risk and the cross-section of stock returns
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arXiv
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| Main Authors: | , |
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| Format: | Preprint |
| Published: |
2024
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| _version_ | 1866910354261409792 |
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| author | Celeny, Daniel Maréchal, Loïc |
| author_facet | Celeny, Daniel Maréchal, Loïc |
| contents | We extract firms' cyber risk with a machine learning algorithm measuring the proximity between their disclosures and a dedicated cyber corpus. Our approach outperforms dictionary methods, uses full disclosure and not devoted-only sections, and generates a cyber risk measure uncorrelated with other firms' characteristics. We find that a portfolio of US-listed stocks in the high cyber risk quantile generates an excess return of 18.72% p.a. Moreover, a long-short cyber risk portfolio has a significant and positive risk premium of 6.93% p.a., robust to all factors' benchmarks. Finally, using a Bayesian asset pricing method, we show that our cyber risk factor is the essential feature that allows any multi-factor model to price the cross-section of stock returns. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2402_04775 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Cyber risk and the cross-section of stock returns Celeny, Daniel Maréchal, Loïc Portfolio Management We extract firms' cyber risk with a machine learning algorithm measuring the proximity between their disclosures and a dedicated cyber corpus. Our approach outperforms dictionary methods, uses full disclosure and not devoted-only sections, and generates a cyber risk measure uncorrelated with other firms' characteristics. We find that a portfolio of US-listed stocks in the high cyber risk quantile generates an excess return of 18.72% p.a. Moreover, a long-short cyber risk portfolio has a significant and positive risk premium of 6.93% p.a., robust to all factors' benchmarks. Finally, using a Bayesian asset pricing method, we show that our cyber risk factor is the essential feature that allows any multi-factor model to price the cross-section of stock returns. |
| title | Cyber risk and the cross-section of stock returns |
| topic | Portfolio Management |
| url | https://arxiv.org/abs/2402.04775 |