Common Idiosyncratic Quantile Factors and Asset Prices

Jozef Baruník and Matej Nevrla

Papers from arXiv.org

Abstract: We investigate whether the tails of firm-level idiosyncratic return distributions are driven by common shocks. We use quantile factor analysis to extract such common idiosyncratic quantile factors with asymmetric pricing effects and we find a significant premium for innovations to the lower-tail factor: high-beta stocks outperform low-beta stocks by around 7-8% per year. This premium remains significant even when controlling for standard factors, idiosyncratic volatility and tail-risk measures. The downside factor strengthens when intermediary capital is weak and market liquidity is low, and it predicts aggregate market excess returns.

Date: 2022-08, Revised 2026-03
New Economics Papers: this item is included in nep-fmk and nep-rmg
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