The drivers of downside equity tail risk
AbstractWe 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 45591.
Date of creation: 28 Feb 2013
Date of revision:
Extreme Value Theory; Hypothesis Testing; Tail Index; Tail Risk;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-30 (All new papers)
- NEP-RMG-2013-03-30 (Risk Management)
- NEP-UPT-2013-03-30 (Utility Models & Prospect Theory)
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