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

Chevaptrakul, Thanaset; Xu, Zhongxiang; Yao, Kai

Authors

Thanaset Chevaptrakul

Zhongxiang Xu

Kai Yao



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.

Journal Article Type Article
Publication Date 2019-01
Print ISSN 1059-0560
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 59
Pages 289-301
APA6 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. doi:10.1016/j.iref.2018.09.005
DOI https://doi.org/10.1016/j.iref.2018.09.005
Keywords Quantile regression; Stock markets; Return predictability; Asymmetry
Publisher URL https://www.sciencedirect.com/science/article/pii/S1059056017307268

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