Tail Risk and Asset Prices / Bryan Kelly, Hao Jiang.

Format:

Book

Author/Creator:

Kelly, Bryan.

Contributor:

National Bureau of Economic Research.

Jiang, Hao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19375.

NBER working paper series no. w19375

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

We propose a new measure of time-varying tail risk that is directly estimable from the cross section of returns. We exploit firm-level price crashes every month to identify common fluctuations in tail risk across stocks. Our tail measure is significantly correlated with tail risk measures extracted from S&P 500 index options, but is available for a longer sample since it is calculated from equity data. We show that tail risk has strong predictive power for aggregate market returns: A one standard deviation increase in tail risk forecasts an increase in excess market returns of 4.5% over the following year. Cross-sectionally, stocks with high loadings on past tail risk earn an annual three-factor alpha 5.4% higher than stocks with low tail risk loadings. These findings are consistent with asset pricing theories that relate equity risk premia to rare disasters or other forms of tail risk.

Notes:

Print version record

August 2013.