IDEAS home Printed from https://ideas.repec.org/a/bdy/modfin/v1y2023i1p17-29id7.html
   My bibliography  Save this article

Is tail risk priced in the cross-section of international stock index returns?

Author

Listed:
  • Aleksander Mercik

Abstract

This study examines the predictive power of tail risk measures in stock indices returns using a comprehensive dataset covering 50 countries from 1926 to 2021. Our findings reveal that tail risk measures exhibit predictive power when considered independently. However, their forecasting abilities disappear when other risk and return factors are incorporated. This suggests that tail risk measures do not contain incremental information about the cross-section of stock returns beyond the commonly used global factors. Our findings are robust across various considerations, holding for alternative tail risk measure types, estimation periods, and different control variables subsets.

Suggested Citation

  • Aleksander Mercik, 2023. "Is tail risk priced in the cross-section of international stock index returns?," Modern Finance, Modern Finance Institute, vol. 1(1), pages 17-29.
    • Handle: RePEc:bdy:modfin:v:1:y:2023:i:1:p:17-29:id:7
    as

    Download full text from publisher

    File URL: https://mf-journal.com/article/view/7/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    2. George P. Gao & Xiaomeng Lu & Zhaogang Song, 2019. "Tail Risk Concerns Everywhere," Management Science, INFORMS, vol. 65(7), pages 3111-3130, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lee, Kuan-Hui & Yang, Cheol-Won, 2022. "The world price of tail risk," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    2. Abugri, Benjamin A. & Dutta, Sandip, 2014. "Are we overestimating REIT idiosyncratic risk? Analysis of pricing effects and persistence," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 249-259.
    3. Bazdresch, Santiago, 2011. "Product differentiation and systematic risk: theory and empirical evidence," MPRA Paper 35504, University Library of Munich, Germany, revised 01 Nov 2011.
    4. Turan G. Bali & Robert F. Engle & Yi Tang, 2017. "Dynamic Conditional Beta Is Alive and Well in the Cross Section of Daily Stock Returns," Management Science, INFORMS, vol. 63(11), pages 3760-3779, November.
    5. Javier Vidal-García & Marta Vidal & Sabri Boubaker & Riadh Manita, 2019. "Idiosyncratic risk and mutual fund performance," Annals of Operations Research, Springer, vol. 281(1), pages 349-372, October.
    6. Nathan Lassance & Victor DeMiguel & Frédéric Vrins, 2022. "Optimal Portfolio Diversification via Independent Component Analysis," Operations Research, INFORMS, vol. 70(1), pages 55-72, January.
    7. Zhong, Angel, 2018. "Idiosyncratic volatility in the Australian equity market," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 105-125.
    8. Jyri Kinnunen & Minna Martikainen, 2017. "Expected Returns and Idiosyncratic Risk: Industry-Level Evidence from Russia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(11), pages 2528-2544, November.
    9. Nektarios Aslanidis & Charlotte Christiansen & Neophytos Lambertides & Christos S. Savva, 2019. "Idiosyncratic volatility puzzle: influence of macro-finance factors," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 381-401, February.
    10. Claudiu Vinte & Marcel Ausloos, 2022. "The Cross-Sectional Intrinsic Entropy. A Comprehensive Stock Market Volatility Estimator," Papers 2205.00104, arXiv.org.
    11. Becchetti, Leonardo & Ciciretti, Rocco & Hasan, Iftekhar, 2015. "Corporate social responsibility, stakeholder risk, and idiosyncratic volatility," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 297-309.
    12. Ciciretti, Rocco & Dalò, Ambrogio & Dam, Lammertjan, 2023. "The contributions of betas versus characteristics to the ESG premium," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 104-124.
    13. Long, Huaigang & Zhu, Yanjian & Chen, Lifang & Jiang, Yuexiang, 2019. "Tail risk and expected stock returns around the world," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 162-178.
    14. Aissia, Dorsaf Ben, 2014. "IPO first-day returns: Skewness preference, investor sentiment and uncertainty underlying factors," Review of Financial Economics, Elsevier, vol. 23(3), pages 148-154.
    15. Robert M. Hull & Sungkyu Kwak & Rosemary Walker, 2018. "Hedge fund attributes, insider behavior, and IPO volatility," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 268-292, April.
    16. Czapkiewicz, Anna & Wójtowicz, Tomasz & Zaremba, Adam, 2023. "Idiosyncratic risk and cross-section of stock returns in emerging European markets," Economic Modelling, Elsevier, vol. 124(C).
    17. Maillet, Bertrand & Tokpavi, Sessi & Vaucher, Benoit, 2015. "Global minimum variance portfolio optimisation under some model risk: A robust regression-based approach," European Journal of Operational Research, Elsevier, vol. 244(1), pages 289-299.
    18. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, November.
    19. Mardy Chiah & Philip Gharghori & Angel Zhong, 2020. "Comovement in Anomalies between the Australian and US Equity Markets," International Review of Finance, International Review of Finance Ltd., vol. 20(4), pages 1005-1017, December.
    20. Huang, Teng-Ching & Lin, Bing-Huei & Yang, Tung-Hsiao, 2015. "Herd behavior and idiosyncratic volatility," Journal of Business Research, Elsevier, vol. 68(4), pages 763-770.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdy:modfin:v:1:y:2023:i:1:p:17-29:id:7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Adam Zaremba (email available below). General contact details of provider: https://mf-journal.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.