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Is systematic tail risk priced in China?

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  • Zhao, Shuran
  • Gao, Ruiqing

Abstract

This paper studies the impact of systematic tail risk on cross-sectional expected stock returns in the Chinese stock market. We propose a new measure of systematic tail risk, which identifies the common components of individual stock tail risk through a Quantile Factor Model (QFM). Furthermore, we measure the monthly systematic tail risk beta, which is defined as the sensitivity of stock returns to systematic tail risk, and find that stocks with high past systematic tail risk betas achieve higher excess returns than those with low betas. A value-weighted hedging strategy based on systematic tail risk beta yields approximately 1.16 % monthly returns. This premium cannot be explained by traditional factor models or other firm-level characteristics influencing tail behavior. The positive relationship between systematic tail risk beta and stock returns is stronger during high market volatility, market downturns, and low investor confidence indices.

Suggested Citation

  • Zhao, Shuran & Gao, Ruiqing, 2026. "Is systematic tail risk priced in China?," Finance Research Letters, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:finlet:v:88:y:2026:i:c:s1544612325025577
    DOI: 10.1016/j.frl.2025.109308
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    References listed on IDEAS

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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