Van Oordt, M.R.C. and Zhou, C. (2016). Systematic tail risk Journal of Financial and Quantitative Analysis, 52(2):685--705.
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Affiliated authors
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Publication year2016
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JournalJournal of Financial and Quantitative Analysis
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.