The impact of tail risk on stock market returns: The role of market sentiment

Thanaset Chevapatrakul, Zhongxiang Xu and Kai Yao

International Review of Economics & Finance, 2019, vol. 59, issue C, 289-301

Abstract: We examine the return predictability of time-varying extreme-event risk at the different points on the return distribution using quantile regression. We find evidence of strong predictive power at the lower quantiles for forecast horizons of up to one year. At the higher quantiles, however, our results show no association between tail risk and the excess stock market returns. Taken together, the evidence explains the abnormally large equity premium, observed during periods of sharp falls in stock prices when market sentiment is bearish.

Keywords: Quantile regression; Stock markets; Return predictability; Asymmetry (search for similar items in EconPapers)
JEL-codes: C21 C51 C53 G12 G17 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:59:y:2019:i:c:p:289-301

DOI: 10.1016/j.iref.2018.09.005

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