Tail Risk Concerns Everywhere

41 Pages Posted: 17 May 2015 Last revised: 8 Jun 2017

See all articles by George Gao

George Gao

T. Rowe Price; Cornell University - Samuel Curtis Johnson Graduate School of Management

Xiaomeng Lu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: June 1, 2017

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

Suggested Citation

Gao, George and Lu, Xiaomeng and Song, Zhaogang, Tail Risk Concerns Everywhere (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2606345 or http://dx.doi.org/10.2139/ssrn.2606345

George Gao

T. Rowe Price ( email )

Baltimore, MD 21297-1215
United States

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall 314
Ithaca, NY 14853
United States

Xiaomeng Lu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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