Tail Risk and Asset Prices in the Short-term

Caio Almeida, Gustavo Freire, René Garcia and Rodrigo Hizmeri
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Caio Almeida: Princeton University
Gustavo Freire: Erasmus University Rotterdam
Rodrigo Hizmeri: University of Liverpool

Working Papers from Princeton University. Economics Department.

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 and helps explain the momentum anomaly. Incorporating investors' preferences via risk-neutralization is fundamental to our findings.

Keywords: Left tail risk; return predictability; factor models; risk-neutralization; high-frequency data (search for similar items in EconPapers)
JEL-codes: C58 G12 G17 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2023-06

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