PhD Defense: Tail Risk of Equity Returns
TI PhD student Pengfei Sun will defend his dissertation entitled ‘Tail Risk of Equity Returns’ on Friday October 25th at the Erasmus University Rotterdam. His supervisor is Casper de Vries. His co-supervisor is Chen Zhou.
What is the potential of catastrophic losses in stock portfolios? How can the risks involved be modelled accurately? In his dissertation Pengfei Sun deals with these issues.
A major concern to investors in equity is the downside risk, or the risk of actual return being less than expected return. Equity returns have been modelled as being normally distributed, where 99,97% of all possible returns within a given portfolio fall within the boundaries delineated by three standard deviations (either positive or negative). However, the risk of these rare events is underestimated. There is in fact a heavier so-called tail risk of black swan events, where an extreme deviation from expected returns occurs.
In the first part of the dissertation, Pengfei researches mathematical models that can more accurately assess and forecast the tail risk. This facilitates the creation of financial products that hedge the tail risk, and allows managers to steer towards lower tail risks, potentially enabling them to attract long-term risk averse investors.The second part of the dissertation analyses the cross-section of tail risk in stock returns and further identifies drivers for the differences in tail risk.