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Shape Homogeneity and Scale Heterogeneity of Downside Tail Risk

Author

Listed:
  • Kyle Moore

    (Erasmus University Rotterdam and Tinbergen Institute)

  • Pengfei Sun

    (Erasmus University Rotterdam and Tinbergen Institute)

  • Casper de Vries

    (Erasmus University Rotterdam and Chapman University)

  • Chen Zhou

    (De Nederlandsche Bank and Erasmus University Rotterdam)

Abstract

We analyze the cross-sectional differences in the tail risk of equity returns and identify the drivers of tail risk. We provide two statistical procedures to test the hypothesis of cross-sectional downside tail shape homogeneity. An empirical study of 230 US non-financial firms shows that between 2008 and 2011 the cross-sectional tail shape is homogeneous across equity returns. The heterogeneity in tail risk over this period can be entirely attributed to differences in scale. The differences in scales are driven by the following firm characteristics: market beta, size, book-to-market ratio, leverage and bid-ask spread.

Suggested Citation

  • Kyle Moore & Pengfei Sun & Casper de Vries & Chen Zhou, 2013. "Shape Homogeneity and Scale Heterogeneity of Downside Tail Risk," Working Papers 13-13, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:13-13
    as

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    References listed on IDEAS

    as
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: 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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