 Tail risk and expected stock returns around the worldHuaigang Long, Yanjian Zhu, Lifang Chen and Yuexiang Jiang Pacific-Basin Finance Journal, 2019, vol. 56, issue C, 162-178 Abstract: In this study, we construct three proxies for tail risk observed in 39 markets between 1980 and 2015 to examine its effects on global pricing: TRKJ, following Kelly and Jiang (2014), TRVZ, following Van Oordt and Zhou (2016), and TRHL, following Huang et al. (2012) and Long et al. (2018). Both the portfolio analyses and Fama-MacBeth regressions show that TRKJ has no pricing effect in the international markets, but both TRVZ and TRHL has a negative relationship with future stock returns, especially in developed markets, which is inconsistent with common sense assumptions regarding the risk-return tradeoff. This negative relationship can be explained by the “idiosyncratic volatility puzzle” in the international markets other than the U.S. market. Moreover, a detailed analysis of the U.S. market suggests that the negative tail-risk–stock returns relationship in that market cannot be explained by the momentum effect, skewness, heterogeneous beliefs, the liquidity factor, leverage, or profitability, leaving an unsolved puzzle, which we call the “tail risk puzzle” Keywords: Tail risk; International markets; Return predictability; Tail risk puzzle; Idiosyncratic volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:56:y:2019:i:c:p:162-178 DOI: 10.1016/j.pacfin.2019.06.001 Access Statistics for this article Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee More articles in Pacific-Basin Finance Journal from Elsevier |
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