High-Frequency Tail Risk Premium and Stock Return Predictability

Journal of Financial and Quantitative Analysis, forthcoming

57 Pages Posted: 31 Jul 2018 Last revised: 27 Jul 2023

See all articles by Caio Almeida

Caio Almeida

Princeton University

Kym Ardison

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

Gustavo Freire

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

René Garcia

Université de Montréal ; Toulouse School of Economics

Piotr Orłowski

HEC Montréal; CDI

Date Written: May 16, 2023

Abstract

We propose a novel measure of the market return tail risk premium based on minimum-distance state price densities recovered from high-frequency data. The tail risk premium extracted from intra-day S&P 500 returns predicts the market equity and variance risk premiums and expected excess returns on a cross section of characteristics-sorted portfolios. Additionally, we describe the differential role of the quantity of tail risk, and of the tail premium, in shaping the future distribution of index returns. Our results are robust to controlling for established measures of variance and tail risk, and of risk premiums, in the predictive models.

Keywords: Tail Risk, Risk-Neutral Measure, Expected Shortfall, Intra-day Market Returns, Return Predictability

JEL Classification: G12, G13, G17

Suggested Citation

Almeida, Caio and Ardison, Kym and Freire, Gustavo and Garcia, René and Orłowski, Piotr, High-Frequency Tail Risk Premium and Stock Return Predictability (May 16, 2023). Journal of Financial and Quantitative Analysis, forthcoming, Available at SSRN: https://ssrn.com/abstract=3211954 or http://dx.doi.org/10.2139/ssrn.3211954

Caio Almeida (Contact Author)

Princeton University ( email )

26 Prospect Avenue
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

Gustavo Freire

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://https://www.eur.nl/people/gustavo-freire

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://https://tinbergen.nl/person/2029/gustavo-freire

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

HOME PAGE: http://https://www.erim.eur.nl/people/gustavo-freire/

René Garcia

Université de Montréal ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-7018807 (Phone)

HOME PAGE: http://https://myrenegarcia.wordpress.com

Toulouse School of Economics ( email )

Toulouse
France

Piotr Orłowski

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

CDI ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

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