Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?

54 Pages Posted: 10 Sep 2013 Last revised: 6 Aug 2014

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici

Fordham University

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

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Date Written: August 2014

Abstract

We introduce a new, hybrid measure of stock return tail covariance risk, motivated by the under-diversified portfolio holdings of individual investors, and investigate its cross-sectional predictive power. Our key innovation is that this covariance is measured across the left tail states of the individual stock return distribution, not across those of the market return as in standard systematic risk measures. We document a positive and significant relation between hybrid tail covariance risk (H-TCR) and expected stock returns, with an annualized premium of 9%, in contrast to the insignificant or negative results for purely stock-specific or systematic tail risk measures.

Suggested Citation

Bali, Turan G. and Cakici, Nusret and Whitelaw, Robert F., Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog? (August 2014). NYU Working Paper No. 2451/31271; Georgetown McDonough School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2323458 or http://dx.doi.org/10.2139/ssrn.2323458

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

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Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
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Robert F. Whitelaw (Contact Author)

New York University ( email )

Stern School of Business
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United States
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National Bureau of Economic Research (NBER)

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