Does systematic tail risk matter?

Evarist Stoja, Arnold Polanski, Linh H. Nguyen, Aleksandr Pereverzin

Research output: Contribution to journalArticlepeer-review

Abstract

Systematic tail risk is considered an important determinant of expected returns on risky assets. We examine its impact from two perspectives in a unified framework which originates from a simple asset pricing model. From the first perspective, systematic tail risk is proxied by a generalized tail dependence coefficient and is compensated with an economically sizeable and statistically significant premium. From the second perspective, systematic tail risk is proxied by the product of the same coefficient with a normalised tail risk measure and does not appear to earn a premium. We examine these contradictory findings and attempt to reconcile them. Evidence suggests that the components of our second systematic tail risk measure may be subject to common features. This finding may help explain the contradictory evidence in the literature.
Original languageEnglish
Article number101698
JournalJournal of International Financial Markets, Institutions & Money
Volume82
Early online date13 Dec 2022
DOIs
Publication statusPublished - Jan 2023

Keywords

  • Risk premium
  • Systematic tail risk
  • Tail dependence
  • Tail risk beta

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