Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog? / Turan G. Bali, Nusret Cakici, Robert F. Whitelaw.

Format:

Book

Author/Creator:

Bali, Turan G.

Contributor:

National Bureau of Economic Research.

Cakici, Nusret.

Whitelaw, Robert F.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19460.

NBER working paper series no. w19460

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Hybrid Tail Risk and Expected Stock Returns

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

We introduce a new, hybrid measure of stock return tail covariance risk, motivated by the under-diversified portfolio holdings of individual investors, and investigate its cross-sectional predictive power. Our key innovation is that this covariance is measured across the left tail states of the individual stock return distribution, not across those of the market return as in standard systematic risk measures. We document a positive and significant relation between hybrid tail covariance risk (H-TCR) and expected stock returns, with an annualized premium of 9%, in contrast to the insignificant or negative results for purely stock-specific or systematic tail risk measures.

Notes:

Print version record

September 2013.