Tail risk and asset prices in the short-term

Caio Almeida; Gustavo Freire; René Garcia; Rodrigo Hizmeri

doi:10.1093/rof/rfag014

Review of Finance 2026

Tail risk and asset prices in the short-term

Caio Almeida¹; Gustavo Freire²; René Garcia^3,4; Rodrigo Hizmeri⁵

¹ Department of Economics, Princeton University , 20, Washington Rd, Room 207 , Princeton, NJ, 08540, · ² Nova School of Business and Economics, Universidade NOVA de Lisboa , Campus de Carcavelos , Carcavelos, 2775-405, · ³ Department of Economics, Université de Montréal , 2900 Edouard Montpetit Boulevard , Montreal, H3T 1J4, · ⁴ Toulouse School of Economics , 1 Esplanade de l'Universite , Toulouse, 31080, · ⁵ University of Liverpool Management School, University of Liverpool , Chatham Street , Liverpool, L69 7ZH,

open access

Abstract

We combine high-frequency stock returns with risk-neutralization to extract the daily common component of tail risks perceived by investors in the cross-section of firms. Our tail risk measure significantly predicts the equity premium and variance risk premium at short horizons. Furthermore, a long–short portfolio built by sorting stocks on their recent exposure to tail risk generates abnormal returns with respect to standard factor models. Incorporating investors’ preferences via risk-neutralization is fundamental to our findings: the predictive power of the physical tail risk is weaker and generally subsumed by its risk-neutral counterpart.

DOI: 10.1093/rof/rfag014
Language: en
Sources: openalex crossref

Tail risk and asset prices in the short-term

Abstract

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