I estimate tail risk for Brazil from January 2001 to July 2020 and investigate the origins of tail risk variation. The tail risk measure peaks at stock market crashes, financial crises, political shocks and disaster events such as the coronavirus pandemic. Moreover, I find that tail risk is countercyclical, has strong predictive power for market returns and negatively predicts real economic activity. In order to identify the investors’ concerns associated with tail risk, I extract daily news from the largest financial newspaper in Brazil. The co-movement between news and tail risk indicates that tail risk variation is mainly driven by disaster concerns, followed by economic and government uncertainty. While economic uncertainty explains the countercyclical property of tail risk, investors only require compensation for bearing tail risk implied by disaster concerns. Similarly, tail risk negatively impacts real outcomes because of the disaster concerns that it identifies. These findings support recent models explaining asset pricing puzzles with time-varying disaster risk.
Bibliographical noteFunding Information:
This study was financed in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior - Brasil (CAPES) - Finance Code 001 . I also acknowledge financial support from ANBIMA, Brazil. The funding sources had no involvement in the conduct of the research and preparation of the article.
I would like to thank the editor Hamid Beladi, three anonymous referees, Caio Almeida, Samuel Barbosa, Serge de Valk, Marcelo Fernandes, Ren? Garcia, Felipe Iachan, Bruno Ogava, Caio Martins, Marcelo Resende, Ruy Ribeiro and participants at the 42nd Meeting of the Brazilian Econometric Society 2020 for useful comments and suggestions. This study was financed in part by the Coordena??o de Aperfei?oamento de Pessoal de N?vel Superior - Brasil (CAPES) - Finance Code 001. I also acknowledge financial support from ANBIMA, Brazil. The funding sources had no involvement in the conduct of the research and preparation of the article.