Average tail risk and aggregate stock returns

Yingtong Dai and Richard D.F. Harris

Journal of International Financial Markets, Institutions and Money, 2023, vol. 82, issue C

Abstract: We investigate the role of the average risk across stocks in predicting subsequent market returns using measures of risk that capture the higher moments of the return distribution including variance, skewness and kurtosis, as well as measures of tail risk that combine these. We find that average tail risk has statistically and economically significant predictive ability for market returns, even after controlling for market tail risk, suggesting that average idiosyncratic tail risk contains information about future returns. Average tail risk dominates other measures of average risk that have been documented in the literature, such as variance and skewness. Our results are robust to the inclusion of control variables that capture business cycle effects, and to the use of different measures of tail risk.

Keywords: Aggregate equity returns; Systematic risk; Idiosyncratic risk; Higher moments; Tail risk (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:82:y:2023:i:c:s1042443122001718

DOI: 10.1016/j.intfin.2022.101699

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