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Can tail risk explain size, book‐to‐market, momentum, and idiosyncratic volatility anomalies?

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  • Sofiane Aboura
  • Y. Eser Arisoy

Abstract

We examine the impact of tail risk on the return dynamics of size, book‐to‐market ratio, momentum and idiosyncratic volatility sorted portfolios. Our time‐series analyses document significant portfolio return exposures to aggregate tail risk. In particular, portfolios that contain small, value, high idiosyncratic volatility and low momentum stocks exhibit negative and statistically significant tail risk betas. Our cross‐sectional analyses at the individual stock level suggest that tail risk helps in explaining the four pricing anomalies, particularly size and idiosyncratic volatility anomalies.

Suggested Citation

  • Sofiane Aboura & Y. Eser Arisoy, 2019. "Can tail risk explain size, book‐to‐market, momentum, and idiosyncratic volatility anomalies?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 46(9-10), pages 1263-1298, October.
    • Handle: RePEc:bla:jbfnac:v:46:y:2019:i:9-10:p:1263-1298
    DOI: 10.1111/jbfa.12403
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    Cited by:

    1. Prodosh Simlai, 2021. "Accrual mispricing, value-at-risk, and expected stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1487-1517, November.
    2. Chai, Daniel & Chiah, Mardy & Zhong, Angel & Li, Bob, 2022. "Another look at sources of momentum profits," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 310-323.
    3. Nicolau, João & Rodrigues, Paulo M.M. & Stoykov, Marian Z., 2023. "Tail index estimation in the presence of covariates: Stock returns’ tail risk dynamics," Journal of Econometrics, Elsevier, vol. 235(2), pages 2266-2284.

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