Nonparametric Tail Risk, Stock Returns, and the Macroeconomy

Caio Almeida (), Kym Ardison, René Garcia and Jose Vicente

Journal of Financial Econometrics, 2017, vol. 15, issue 3, 333-376

Abstract: This paper introduces a new tail-risk measure based on the risk-neutral excess expected shortfall of a cross-section of stock returns. We propose a novel way to risk neutralize the returns without relying on option price information. Empirically, we illustrate our methodology by estimating a tail-risk measure over a long historical period based on a set of size and book-to-market portfolios. We find that a risk premium is associated with long-short strategies with portfolio sorts based on tail-risk sensitivities of individual securities. Our tail-risk index also provides meaningful information about future market returns and aggregate macroeconomic conditions. Results are robust to the cross-sectional information and other parameters selected to compute the tail-risk measure.

Keywords: economic predictability; prediction of market returns; risk factor; risk-neutral probability; tail risk (search for similar items in EconPapers)
JEL-codes: G12 G13 G17 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (24)

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Working Paper: Nonparametric Tail Risk, Stock Returns and the Macroeconomy (2016)
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