The impact of tail risk on stock market returns: the role of market sentiment

Chevaptrakul, Thanaset; Xu, Zhongxiang; Yao, Kai

Abstract

We examine the return predictability of time-varying extreme-event risk at the different points on the return distribution using quantile regression. We find evidence of strong predictive power at the lower quantiles for forecast horizons of up to one year. At the higher quantiles, however, our results show no association between tail risk and the excess stock market returns. Taken together, the evidence explains the abnormally large equity premium, observed during periods of sharp falls in stock prices when market sentiment is bearish.

Citation

Chevaptrakul, T., Xu, Z., & Yao, K. (2019). The impact of tail risk on stock market returns: the role of market sentiment. International Review of Economics and Finance, 59, 289-301. https://doi.org/10.1016/j.iref.2018.09.005

• Journal Article Type: Article
• Acceptance Date: Sep 21, 2018
• Online Publication Date: Sep 27, 2018
• Publication Date: 2019-01
• Deposit Date: Oct 17, 2018
• Publicly Available Date: Sep 28, 2019
• Journal: International Review of Economics & Finance
• Print ISSN: 1059-0560
• Electronic ISSN: 1059-0560
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 59
• Pages: 289-301
• DOI: https://doi.org/10.1016/j.iref.2018.09.005
• Keywords: Quantile regression; Stock markets; Return predictability; Asymmetry
• Public URL: https://nottingham-repository.worktribe.com/output/1173098
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1059056017307268
• Additional Information: This article is maintained by: Elsevier; Article Title: The impact of tail risk on stock market returns: The role of market sentiment; Journal Title: International Review of Economics & Finance; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.iref.2018.09.005; Content Type: article; Copyright: Crown Copyright © 2018 Published by Elsevier Inc. All rights reserved.
• Contract Date: Oct 17, 2018