Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?

Turan G. Bali, Nusret Cakici and Robert F. Whitelaw

No 19460, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We introduce a new, hybrid measure of stock return tail covariance risk, motivated by the under-diversified portfolio holdings of individual investors, and investigate its cross-sectional predictive power. Our key innovation is that this covariance is measured across the left tail states of the individual stock return distribution, not across those of the market return as in standard systematic risk measures. We document a positive and significant relation between hybrid tail covariance risk (H-TCR) and expected stock returns, with an annualized premium of 9%, in contrast to the insignificant or negative results for purely stock-specific or systematic tail risk measures.

JEL-codes: C13 G10 G11 (search for similar items in EconPapers)
Date: 2013-09
Note: AP
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Published as “Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?” (with Turan Bali and Nusret Cakici), 2014, Review of Asset Pricing Studies, Vol. 4, No. 2, pp. 206-246.

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