Measuring Tail Risks at High Frequency

61 Pages Posted: 1 Apr 2015 Last revised: 27 Oct 2018

See all articles by Brian Weller

Brian Weller

Duke University - Department of Economics

Date Written: October 25, 2018

Abstract

I exploit information in the cross section of bid-ask spreads to develop a new measure of extreme event risk. Spreads embed tail risk information because liquidity providers require compensation for the possibility of sharp changes in asset values. I show that simple regressions relating spreads and trading volume to factor betas recover this information and deliver high-frequency tail risk estimates for common factors in stock returns. My methodology disentangles financial and aggregate market risks during the 2007-2008 Financial Crisis; quantifies jump risks associated with Federal Open Market Committee announcements; and anticipates an extreme liquidity shock before the 2010 Flash Crash.

Keywords: Tail Risks, High-Frequency Market Making, Bid-Ask Spreads

JEL Classification: C58, G01, G12, G14, G17

Suggested Citation

Weller, Brian, Measuring Tail Risks at High Frequency (October 25, 2018). Available at SSRN: https://ssrn.com/abstract=2587667 or http://dx.doi.org/10.2139/ssrn.2587667

Brian Weller (Contact Author)

Duke University - Department of Economics ( email )

Durham, NC
United States

HOME PAGE: http://sites.google.com/site/brianmweller/

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