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

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Yakup Eser Arısoy

NEOMA Business School

Date Written: May 9, 2016

Abstract

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

Aboura, Sofiane and Arısoy, Yakup Eser, Can Exposure to Aggregate Tail Risk Explain Size, Book-to-Market, and Idiosyncratic Volatility Anomalies? (May 9, 2016). Available at SSRN: https://ssrn.com/abstract=2832893 or http://dx.doi.org/10.2139/ssrn.2832893

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Yakup Eser Arısoy (Contact Author)

NEOMA Business School ( email )

59 rue Pierre Taittinger
Reims, 51100
France

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