High-Frequency Tail Risk Premium and Stock Return Predictability

45 Pages Posted: 31 Jul 2018 Last revised: 21 Mar 2022

See all articles by Caio Almeida

Caio Almeida

Princeton University

Kym Ardison

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

René Garcia

Université de Montréal ; Toulouse School of Economics

Piotr Orłowski

HEC Montréal

Date Written: March 20, 2022

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 estimate extracted from 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. The results are robust to including established measures of tail and variance risk, and of risk premiums, in the predictive models.

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

JEL Classification: G12, G13, G17

Suggested Citation

Almeida, Caio and Ardison, Kym and Garcia, René and Orłowski, Piotr, High-Frequency Tail Risk Premium and Stock Return Predictability (March 20, 2022). 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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
298
Abstract Views
1,474
rank
151,017
PlumX Metrics