Common Idiosyncratic Quantile Risk

44 Pages Posted: 16 Sep 2022 Last revised: 4 Jun 2023

See all articles by Jozef Baruník

Jozef Baruník

Charles University in Prague - Department of Economics; Institute of Information Theory and Automation, Prague

Matěj Nevrla

Academy of Sciences of the Czech Republic - Department of Econometrics

Date Written: August 30, 2022

Abstract

We identify a new type of risk that is characterised by commonalities in the quantiles of the cross-sectional distribution of asset returns. Our newly proposed quantile risk factor is associated with a quantile-specific risk premium and provides new insights into how upside and downside risks are priced by investors. In contrast to the previous literature, we recover the common structure in cross-sectional quantiles without making confounding assumptions or aggregating potentially non-linear information. We discuss how the new quantile-based risk factor differs from popular volatility and downside risk factors, and we identify where the quantile-dependent risks deserve greater compensation. Quantile factors also have predictive power for aggregate market returns.

Keywords: Cross-section of asset returns, factor structure of asset returns, idiosyncratic risk, quantiles, asymmetric risk

JEL Classification: C21, C58, G12

Suggested Citation

Barunik, Jozef and Nevrla, Matěj, Common Idiosyncratic Quantile Risk (August 30, 2022). Available at SSRN: https://ssrn.com/abstract=4204916 or http://dx.doi.org/10.2139/ssrn.4204916

Jozef Barunik (Contact Author)

Charles University in Prague - Department of Economics ( email )

Opletalova 26
Prague 1, 110 00
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/en/staff/barunik

Institute of Information Theory and Automation, Prague ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

HOME PAGE: http://staff.utia.cas.cz/barunik/home.htm

Matěj Nevrla

Academy of Sciences of the Czech Republic - Department of Econometrics ( email )

Czech Republic

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