Quantile Spectral Beta: A Tale of Tail Risks, Investment Horizons, and Asset Prices

55 Pages Posted: 30 Jun 2018 Last revised: 10 Dec 2021

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: June 15, 2018

Abstract

This paper investigates how two important sources of risk -- market tail risk and extreme market volatility risk -- are priced into the cross-section of asset returns across various investment horizons. To identify such risks, we propose a quantile spectral beta representation of risk based on the decomposition of covariance between indicator functions that capture fluctuations over various frequencies. We study the asymptotic behavior of the proposed estimators of such risk. Empirically, we find that tail risk is a short-term phenomenon, whereas extreme volatility risk is priced by investors in the long term when pricing a cross-section of individual stocks. In addition, we study popular industry, size and value, profit, investment or book-to-market portfolios, as well as portfolios constructed from various asset classes, portfolios sorted on cash flow duration and other strategies. These results reveal that tail-dependent and horizon-specific risks are priced heterogeneously across datasets and are important sources of risk for investors.

Keywords: Cross-sectional return variation, downside risk, tail risk, frequency, spectral risk, investment horizons

JEL Classification: C21, C58, G12

Suggested Citation

Barunik, Jozef and Nevrla, Matěj, Quantile Spectral Beta: A Tale of Tail Risks, Investment Horizons, and Asset Prices (June 15, 2018). Available at SSRN: https://ssrn.com/abstract=3197408 or http://dx.doi.org/10.2139/ssrn.3197408

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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