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Empirical evidence of systemic tail risk premium in the Johannesburg Stock Exchange

Author

Listed:
  • Kouadio, Jean Joel
  • Mwamba, Muteba
  • Bonga-Bonga, Lumengo

Abstract

This paper assesses the impact of systematic tail risk of stocks, defined as a stock’s exposure to market tail events, on the cross section returns of an emerging stock exchange, especially the Johannesburg Stock Exchange (JSE) from January 2002 through June 2018. If stock market investors are crash-averse, then holding stocks that experience high exposure to market tail events should be rewarded with a premium. The paper therefore sets out to determine whether high exposure to market tail events translates into higher returns of stocks traded on the JSE. To achieve this objective, the study extends on the work of Chabi-Yo, Ruenzi and Weigert (2015) based on extreme value theory (EVT) and copula models as well as the traditional asset pricing tools of portfolio formation and cross-sectional regressions. The results of the empirical analysis support the existence of a systematic tail risk premium in the JSE. Interestingly, the effect of systematic tail risk on the cross section of JSE returns is time-varying and independent from that of risk measures such as beta and downside beta and firm characteristics such as book-to-market (BTM) ratio, size and past returns. In addition, the study provides evidence on the impact of financial crises on crash aversion.

Suggested Citation

  • Kouadio, Jean Joel & Mwamba, Muteba & Bonga-Bonga, Lumengo, 2019. "Empirical evidence of systemic tail risk premium in the Johannesburg Stock Exchange," MPRA Paper 96570, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:96570
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    File URL: https://mpra.ub.uni-muenchen.de/96570/1/MPRA_paper_96570.pdf
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    References listed on IDEAS

    as
    1. Bryan Kelly & Hao Jiang, 2014. "Editor's Choice Tail Risk and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 27(10), pages 2841-2871.
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    8. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Capital market equilibrium in a mean-lower partial moment framework," Journal of Financial Economics, Elsevier, vol. 5(2), pages 189-200, November.
    9. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    systematic tail risk; stock exchange; extreme value theory; copula;

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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