High Frequency Tail Risk

57 Pages Posted: 31 Jul 2018

See all articles by Caio Almeida

Caio Almeida

Getulio Vargas Foundation ; Princeton University

Kym Ardison

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Date Written: July 11, 2018

Abstract

This paper proposes an alternative way to measure high-frequency Tail Risk directly extracted from stocks returns: A risk-neutral mean-adjusted expected shortfall. We rely on a non-parametric estimator for the state price density based on Hellinger's distance to risk-neutralize returns. Since the measure dispenses option prices, it can be potentially applied to a broader number of markets than corresponding option-based measures. Empirically, our tail risk factor extracted from S&P 500 returns has a 90% correlation with the VIX index. We document a persistent negative relation between tail risk and one-day ahead returns, for different assets. Consistent with the crash-insurance property of put options, tail risk predicts positive one-day ahead returns for portfolios long out-of-the-money, short in-the-money put options. An analysis of stock portfolios sorted on exposure to tail risk reveals a premium for bearing such a risk, even when controlling for known and established factors related to cross-section variability. The cross-sectional analysis is also robust to the inclusion of uncertainty indexes, macroeconomic and volatility measures.

Suggested Citation

Almeida, Caio and Ardison, Kym and Garcia, René, High Frequency Tail Risk (July 11, 2018). Available at SSRN: https://ssrn.com/abstract=3211954 or http://dx.doi.org/10.2139/ssrn.3211954

Caio Almeida (Contact Author)

Getulio Vargas Foundation ( email )

Praia de Botafogo 190, 11o andar
Botafogo
Rio de Janeiro, Rio de Janeiro 22250-900
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5521-37995827 (Phone)
5521-2553-8821 (Fax)

HOME PAGE: http://www.fgv.br/professor/calmeida/

Princeton University ( email )

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Princeton, NJ 08540
United States

Kym Ardison

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

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