Systematic tail risk

MRC (Maarten) van Oordt, Chen Zhou

Research output: Contribution to journalArticleAcademicpeer-review

48 Citations (Scopus)

Abstract

We test for the presence of a systematic tail risk premium in the cross section of expected returns by applying a measure of the sensitivity of assets to extreme market downturns, the tail beta. Empirically, historical tail betas help predict the future performance of stocks in extreme market downturns. During a market crash, stocks with historically high tail betas suffer losses that are approximately 2 to 3 times larger than their low-tail-beta counterparts. However, we find no evidence of a premium associated with tail betas. The theoretically additive and empirically persistent tail betas can help assess portfolio tail risks.
Original languageEnglish
Pages (from-to)685-705
Number of pages21
JournalJournal of Financial and Quantitative Analysis
Volume51
Issue number2
DOIs
Publication statusPublished - 2016

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