Tail Risk Concerns Everywhere

Abstract

We show that the beta with respect to an index of global ex-ante tail risk concerns (GRIX), which we construct using out-of-the-money options on multiple global assets, negatively drives cross-sectional return variations across asset classes, including international equity indices, foreign currencies, and government bond futures. The pricing power of GRIX becomes stronger when more asset-class-level tail risk concerns are incorporated in the index construction, and dominates within each asset class, implying that the pricing effect of tail risk concerns works predominantly as a global channel. The GRIX pricing effect is distinct from that of tail risk factors based on historical realizations, consistent with the interpretation that tail risk concerns likely reflect investors' ex-ante subjective belief about tail risk.

Keywords: Asset Class; Bond; Currency; Equity; Option; Tail Risk Concerns

JEL Classification: G12, G13, F37