Tail Risk and Asset Prices in the Short-term

51 Pages Posted: 23 Sep 2022 Last revised: 2 Dec 2023

See all articles by Caio Almeida

Caio Almeida

Princeton University

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

Rodrigo Hizmeri

University of Liverpool - Management School (ULMS)

Date Written: December 1, 2023

Abstract

We combine high-frequency stock returns with risk-neutralization to extract the daily common component of tail risks perceived by investors in the cross-section of firms. Our tail risk measure significantly predicts the equity premium and variance risk premium at short-horizons. Furthermore, a long-short portfolio built by sorting stocks on their recent exposure to tail risk generates abnormal returns with respect to standard factor models. Incorporating investors' preferences via risk neutralization is fundamental to our findings: the predictive power of the physical tail risk is weaker and generally subsumed by its risk-neutral counterpart.

Keywords: Left tail risk, return predictability, factor models, risk-neutralization, high-frequency data

JEL Classification: C58, G12, G17

Suggested Citation

Almeida, Caio and Freire, Gustavo and Garcia, René and Hizmeri, Rodrigo, Tail Risk and Asset Prices in the Short-term (December 1, 2023). Available at SSRN: https://ssrn.com/abstract=4216981 or http://dx.doi.org/10.2139/ssrn.4216981

Caio Almeida (Contact Author)

Princeton University ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

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

Rodrigo Hizmeri

University of Liverpool - Management School (ULMS) ( email )

Chatham St.
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.rodrigohizmeri.com

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