Beware of the Crash Risk: Tail Beta and the Cross-Section of Stock Returns in China
30 Pages Posted: 8 Apr 2019 Last revised: 3 May 2019
Date Written: March 3, 2019
We investigate the pricing of systematic tail risk measured by tail beta in the Chinese equity market. Using an array of tests, we examine the performance of more than 3,300 stocks for the years 1999 through 2018. Contrary to evidence from developed markets, we demonstrate a strong negative relationship between the tail beta and future returns. The effect is robust to many considerations and cannot be explained by established pricing factors or alternative risk or illiquidity measures. We link our findings to specific characteristics of the Chinese stock market.
Keywords: Systematic Tail Risk, Tail Beta, Extreme Value Theory, China, Equity Market, Asset Pricing, Return Predictability, Low-Risk Anomaly
JEL Classification: G12, G14
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