Systematic Extreme Downside Risk

Harris, Richard D F; Nguyen, Linh H; Stoja, Evarista

Abstract

We propose new systematic tail risk measures constructed using two different approaches. The first is a non-parametric measure that captures the tendency of a stock to crash at the same time as the market, while the second is based on the sensitivity of stock returns to innovations in market crash risk. Both tail risk measures are associated with a significantly positive risk premium after controlling for other measures of downside risk, including downside beta, coskewness and cokurtosis. Using the new measures, we examine the relevance for investors of the tail risk premium over different horizons.

• Journal Article Type: Article
• Acceptance Date: Feb 25, 2019
• Online Publication Date: Feb 25, 2019
• Publication Date: 2019-07
• Deposit Date: Aug 21, 2023
• Publicly Available Date: Aug 23, 2023
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 61
• Pages: 128-142
• DOI: https://doi.org/10.1016/j.intfin.2019.02.007
• Keywords: Asset pricing; Tail risk; Comoments; Value at Risk; Systematic risk JEL codes: C13; C31; C58; G01; G10; G12
• Public URL: https://nottingham-repository.worktribe.com/output/24574564
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S1042443117305814?via%3Dihub