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Does systematic tail risk matter?

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  • Stoja, Evarist
  • Polanski, Arnold
  • Nguyen, Linh H.
  • Pereverzin, Aleksandr

Abstract

Systematic tail risk is considered an important determinant of expected returns on risky assets. We examine its impact from two perspectives in a unified framework which originates from a simple asset pricing model. From the first perspective, systematic tail risk is proxied by a generalized tail dependence coefficient and is compensated with an economically sizeable and statistically significant premium. From the second perspective, systematic tail risk is proxied by the product of the same coefficient with a normalized tail risk measure and does not appear to earn a premium. We examine these contradictory findings and attempt to reconcile them. Evidence suggests that the components of our second systematic tail risk measure may be subject to common features. This finding may help explain the contradictory evidence in the literature.

Suggested Citation

  • Stoja, Evarist & Polanski, Arnold & Nguyen, Linh H. & Pereverzin, Aleksandr, 2023. "Does systematic tail risk matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:intfin:v:82:y:2023:i:c:s1042443122001706
    DOI: 10.1016/j.intfin.2022.101698
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    More about this item

    Keywords

    Tail dependence; Systematic tail risk; Tail risk beta; Risk premium;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • 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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