Can Exposure to Aggregate Tail Risk Explain Size, Book-to-Market, and Idiosyncratic Volatility Anomalies?
26 Pages Posted: 2 Sep 2016 Last revised: 10 Nov 2016
Date Written: May 9, 2016
We examine the impact of aggregate tail risk on return dynamics of size, book-to-market ratio, and idiosyncratic volatility sorted portfolios. Using changes in VIX Tail Hedge Index (ΔVXTH) as a proxy for aggregate tail risk, and controlling for market, size, book-to-market, and aggregate volatility risk, we document significant portfolio return exposures to tail risk. In particular, portfolios that contain small, value and volatile stocks exhibit consistently positive and statistically significant tail risk betas, whereas portfolios of big, growth and non-volatile stocks exhibit negative tail risk betas. We posit that due to their positive tail risk exposures, tail risk-averse investors demand extra compensation to hold small, value, and high idiosyncratic volatility stocks. Our results offer a tail risk-based explanation to size, value, and idiosyncratic volatility anomalies.
Keywords: Tail risk, Idiosyncratic volatility, Size, Value, Anomalies
JEL Classification: C4, G13, G32
Suggested Citation: Suggested Citation