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Systematic tail risk

Author

Listed:
  • Maarten van Oordt
  • Chen Zhou

Abstract

We test for the presence of a systematic tail risk premium in the cross-section of expected returns by applying a measure on the sensitivity of assets to extreme market downturns, the tail beta. Empirically, historical tail betas help to predict the future performance of stocks under extreme market downturns. During a market crash, stocks with historically high tail betas suffer losses that are approximately 2 to 3 times larger than their low tail beta counterparts. However, we find no evidence of a premium associated with tail betas. The theoretically additive and empirically persistent tail betas can help to assess portfolio tail risks.

Suggested Citation

  • Maarten van Oordt & Chen Zhou, 2013. "Systematic tail risk," DNB Working Papers 400, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:400
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    File URL: https://www.dnb.nl/en/binaries/Working%20Paper%20400_tcm47-299052.pdf
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    Cited by:

    1. Y. Lemp'eri`ere & C. Deremble & T. T. Nguyen & P. Seager & M. Potters & J. P. Bouchaud, 2014. "Risk Premia: Asymmetric Tail Risks and Excess Returns," Papers 1409.7720, arXiv.org, revised Oct 2015.
    2. Nicholas Apergis, 2015. "Money Demand Sensitivity to Interest Rates: The Case of Japans Zero-Interest Rate Policy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(9), pages 1043-1049, September.
    3. Maarten van Oordt & Chen Zhou, 2014. "Systemic risk and bank business models," DNB Working Papers 442, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Tail beta; systematic risk; asset pricing; Extreme Value Theory; risk management;

    JEL classification:

    • 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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