Is tail risk the missing link between institutions and risk?

Bertrand Groslambert (), Devraj Basu () and Wan Ni Lai ()
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Bertrand Groslambert: Skema Business School – Université Côte d`Azur, France
Devraj Basu: Strathclyde University, Glasgow, UK
Wan Ni Lai: Skema Business School – Université Côte d''Azur, France

Economics Bulletin, 2019, vol. 39, issue 2, 1435-1448

Abstract: This paper examines the link between risk and institutional quality, an unresolved issue in finance. Our hypothesis is that institutions affect risk through extreme events and less through volatility. We focus on relative tail risk with an original approach that is able to estimate historical tail risk with greater precision. Using international stock market data, we show that tail risk is stable over time, unlike volatility. We find that tail risk captures the relation between risk and institutional quality better than volatility. Better governa

Keywords: Stock markets; Tail risk; Institutional quality; Governance (search for similar items in EconPapers)
JEL-codes: F3 G2 (search for similar items in EconPapers)
Date: 2019-06-15
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