The cross-section of tail risks in stock returns
AbstractThis paper investigates how the downside tail risk of stock returns is differentiated cross-sectionally. Stock returns follow heavy-tailed distributions with downside tail risk determined by the tail shape and scale. If safety-first investors are concerned with sufficiently large downside losses, i.e. have a sufficiently low risk tolerance, then in the equilibrium, assets traded in the same market share a homogeneous tail shape parameter. Furthermore, if tail shapes are homogeneous, the equilibrium prices of assets are differentiated by the scales.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 45592.
Date of creation: 19 Feb 2013
Date of revision:
Heavy-tail distribution; safety-first utility; asset pricing;
Find related papers by JEL classification:
- 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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