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Tail Risk and Asset Prices in the Short-term

Author

Listed:
  • Caio Almeida

    (Princeton University)

  • Gustavo Freire

    (Erasmus University Rotterdam)

  • René Garcia

    (Université de Montréal)

  • Rodrigo Hizmeri

    (University of Liverpool)

Abstract

We combine high-frequency stock returns with risk-neutralization to extract the daily common component of tail risks perceived by investors in the cross-section of firms. Our tail risk measure significantly predicts the equity premium and variance risk premium at short-horizons. Furthermore, a long-short portfolio built by sorting stocks on their recent exposure to tail risk generates abnormal returns with respect to standard factor models and helps explain the momentum anomaly. Incorporating investors' preferences via risk-neutralization is fundamental to our findings.

Suggested Citation

  • Caio Almeida & Gustavo Freire & René Garcia & Rodrigo Hizmeri, 2023. "Tail Risk and Asset Prices in the Short-term," Working Papers 2023-06, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2023-06
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    More about this item

    Keywords

    Left tail risk; return predictability; factor models; risk-neutralization; high-frequency data;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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