Can Tail Risk Explain Size, Book-to-Market, Momentum, and Idiosyncratic Volatility Anomalies?

Abstract

We examine the impact of tail risk on the return dynamics of size, book-to-market ratio, momentum, and idiosyncratic volatility sorted portfolios. Our time-series analyses document significant portfolio return exposures to aggregate tail risk. In particular, portfolios that contain small, value, high idiosyncratic volatility, and low momentum stocks exhibit negative and statistically significant tail risk betas. Our cross-sectional analyses at the individual stock level suggest that tail risk helps in explaining the four pricing anomalies, particularly size and idiosyncratic volatility anomalies.

Keywords: Tail risk, Size, Value, Momentum, Idiosyncratic volatility, Anomalies

JEL Classification: C4, G11, G12