Does systematic tail risk matter?

Stoja, Evarist; Polanski, Arnold; Nguyen, Linh H.; Pereverzin, Aleksandr

Abstract

Systematic tail risk is considered an important determinant of expected returns on risky assets. We examine its impact from two perspectives in a unified framework which originates from a simple asset pricing model. From the first perspective, systematic tail risk is proxied by a generalized tail dependence coefficient and is compensated with an economically sizeable and statistically significant premium. From the second perspective, systematic tail risk is proxied by the product of the same coefficient with a normalized tail risk measure and does not appear to earn a premium. We examine these contradictory findings and attempt to reconcile them. Evidence suggests that the components of our second systematic tail risk measure may be subject to common features. This finding may help explain the contradictory evidence in the literature.

Citation

Stoja, E., Polanski, A., Nguyen, L. H., & Pereverzin, A. (2023). Does systematic tail risk matter?. Journal of International Financial Markets, Institutions and Money, 82, Article 101698. https://doi.org/10.1016/j.intfin.2022.101698

• Journal Article Type: Article
• Acceptance Date: Nov 27, 2022
• Online Publication Date: Dec 13, 2022
• Publication Date: 2023-01
• Deposit Date: Aug 21, 2023
• Publicly Available Date: Aug 24, 2023
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Electronic ISSN: 1873-0612
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 82
• Article Number: 101698
• DOI: https://doi.org/10.1016/j.intfin.2022.101698
• Keywords: Tail Dependence; Systematic Tail Risk; Tail Risk Beta; Risk Premium JEL: C14; G11; G12
• Public URL: https://nottingham-repository.worktribe.com/output/24574662
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1042443122001706?via%3Dihub