Tail Risks, Investment Horizons, and Asset Prices
53 Pages Posted: 30 Jun 2018 Last revised: 21 Dec 2020
Date Written: June 15, 2018
We show that the two important sources of risk -- market tail risk and extreme market volatility risk -- are priced in the cross-section of asset returns heterogeneously across horizons. Specifically, we find that tail risk is a short-term phenomenon whereas extreme volatility risk is priced by investors in the long-term. These risks stem from a dependence structures in the joint distribution of stochastic discount factor and asset returns at various investment horizons that are more general than usually assumed by traditional covariance-based measures. The risk premium we document suggests that investors care about the transitory as well as persistent shocks.
Keywords: Cross-sectional return variation, downside risk, tail risk, frequency, spectral risk, investment horizons
JEL Classification: C21, C58, G12
Suggested Citation: Suggested Citation