Nonparametric tail risk, stock returns, and the macroeconomy

Caio Almeida, Kym Ardison, René Garcia, Jose Vicente

Research output: Contribution to journalArticle

11 Scopus citations

Abstract

This paper introduces a new tail-risk measure based on the risk-neutral excess expected shortfall of a cross-section of stock returns. We propose a novel way to risk neutralize the returns without relying on option price information. Empirically, we illustrate our methodology by estimating a tail-risk measure over a long historical period based on a set of size and book-to-market portfolios. We find that a risk premium is associated with long-short strategies with portfolio sorts based on tail-risk sensitivities of individual securities. Our tail-risk index also provides meaningful information about future market returns and aggregate macroeconomic conditions. Results are robust to the cross-sectional information and other parameters selected to compute the tail-risk measure.

Original languageEnglish (US)
Pages (from-to)333-376
Number of pages44
JournalJournal of Financial Econometrics
Volume15
Issue number3
DOIs
StatePublished - Jun 1 2017
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Economic predictability
  • Prediction of market returns
  • Risk factor
  • Risk-neutral probability
  • Tail risk

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