Tail Risks, Investment Horizons, and Asset Prices

53 Pages Posted: 30 Jun 2018 Last revised: 21 Dec 2020

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

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

Barunik, Jozef and Nevrla, Matěj, 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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