Common Idiosyncratic Quantile Risk
44 Pages Posted: 16 Sep 2022 Last revised: 4 Jun 2023
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: Suggested Citation