Tail Risk and Asset Prices
@article{Kelly2013TailRA,
title={Tail Risk and Asset Prices},
author={B. Kelly and H. Jiang},
journal={Econometric Modeling: Capital Markets - Asset Pricing eJournal},
year={2013}
}We propose a new measure of time-varying tail risk that is directly estimable from the cross-section of returns. We exploit firm-level price crashes every month to identify common fluctuations in tail risk among individual stocks. Our tail measure is significantly correlated with tail risk measures extracted from S&P 500 index options and negatively predicts real economic activity. We show that tail risk has strong predictive power for aggregate market returns. Cross-sectionally, stocks with… CONTINUE READING
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