Systematic Extreme Downside Risk
Posted: 30 Apr 2019
Date Written: February 25, 2019
We propose new systematic tail risk measures constructed using two different approaches. The first is a non-parametric measure that captures the tendency of a stock to crash at the same time as the market, while the second is based on the sensitivity of stock returns to innovations in market crash risk. Both tail risk measures are associated with a significantly positive risk premium after controlling for other measures of downside risk, including downside beta, coskewness and cokurtosis. Using the new measures, we examine the relevance for investors of the tail risk premium over different horizons.
Keywords: Asset pricing, Tail risk, Comoments, Value at Risk, Systematic risk
JEL Classification: C13, C31, C58, G01, G10, G12
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