Can Tail Risk Explain Size, Book‐To‐Market, Momentum, and Idiosyncratic Volatility Anomalies?

We examine the impact of tail risk on the return dynamics of size, book‐to‐market ratio, momentum and idiosyncratic volatility sorted portfolios. Our time‐series analyses document significant portfolio return exposures to aggregate tail risk. In particular, portfolios that contain small, value, high idiosyncratic volatility and low momentum stocks exhibit negative and statistically significant tail risk betas. Our cross‐sectional analyses at the individual stock level suggest that tail risk helps in explaining the four pricing anomalies, particularly size and idiosyncratic volatility anomalies.

Keywords: anomalies, idiosyncratic volatility, momentum, size, tail risk, value

JEL Classification: C4, G11, G12

Suggested Citation: Suggested Citation

Aboura, Sofiane and Arisoy, Y. Eser, Can Tail Risk Explain Size, Book‐To‐Market, Momentum, and Idiosyncratic Volatility Anomalies? (October/November 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 9-10, pp. 1263-1298, 2019, Available at SSRN: https://ssrn.com/abstract=3604491 or http://dx.doi.org/10.1111/jbfa.12403