31 Pages Posted: 13 May 2014
Date Written: May 1, 2014
I propose a new measure of common, time-varying tail risk for large cross sections of stock returns. Stock return tails are described by a power law in which the power law exponent is allowed to transition smoothly through time as a function of recent data. It is motivated by asset pricing theory and is estimable via quasi-maximum likelihood. Estimates indicate substantial time variation in stock return tails, and that the risk of extreme returns rises in weak economic conditions.
Suggested Citation: Suggested Citation
Kelly, Bryan T., The Dynamic Power Law Model (May 1, 2014). Chicago Booth Research Paper No. 14-14; Fama-Miller Working Paper . Available at SSRN: https://ssrn.com/abstract=2436102 or http://dx.doi.org/10.2139/ssrn.2436102
By Bing Liang