Tail risk and asset prices in the short-term

Tail risk and asset prices in the short-term

• Author
• Caio Almeida
• Co-authors
• Rene Garcia , Gustavo Freire , Rodrigo Hizmeri
• Abstract

• We combine high-frequency stock returns with risk-neutralization to extract the daily common component of tail risks perceived by investors in the cross-section of firms. We find that our tail risk measure significantly predicts the equity premium, variance risk premium and realized moments of market returns at short-horizons. Furthermore, a long-short portfolio built by sorting stocks on their recent exposure to tail risk generates abnormal returns with respect to standard factor models and helps explain the momentum anomaly. Incorporating investors’ preferences via risk-neutralization is fundamental to our findings.

• Keywords
• Left tail risk, return predictability, factor models, risk-neutralization, high-frequency data
• Subject Area
• Asset pricing, investments, and Derivatives

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