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The drivers of downside equity tail risk

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  • Moore, Kyle
  • Sun, Pengei
  • de Vries, Casper G.
  • Zhou, Chen

Abstract

We analyze the cross-sectional differences in the tail risk of equity returns and identify the drivers of tail risk. We provide two statistical procedures to test the hypothesis of cross-sectional downside tail shape homogeneity. An empirical study of 230 US non-financial firms shows that between 2008 and 2011 the cross-sectional tail shape is homogeneous across equity returns. The heterogeneity in tail risk over this period can be entirely attributed to differences in scale. The differences in scales are driven by the following firm characteristics: market beta, size, book-to-market ratio, leverage and bid-ask spread.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45591.

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Date of creation: 28 Feb 2013
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Handle: RePEc:pra:mprapa:45591

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Keywords: Extreme Value Theory; Hypothesis Testing; Tail Index; Tail Risk;

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  1. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, American Finance Association, vol. 32(3), pages 663-82, June.
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  7. Ibragimov, Rustam & Walden, Johan, 2008. "Portfolio diversification under local and moderate deviations from power laws," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 594-599, April.
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  15. repec:dgr:uvatin:2005008 is not listed on IDEAS
  16. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(2), pages 223-249, December.
  17. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(1), pages 3-18, March.
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