Journal of Financial and Quantitative Analysis Vol. 51 No. 2 2016
Systematic Tail Risk
open access
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.
- DOI
- 10.1017/s0022109016000193
- Volume
- 51
- Issue
- 2
- Pages
- 685-705
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref