Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
54 Pages Posted: 9 Oct 2011 Last revised: 6 Aug 2014
There are 7 versions of this paper
Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?
Date Written: August 2014
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.
Keywords: tail risk, downside risk, under-diversification, expected stock returns
JEL Classification: G10, G11, C13
Suggested Citation: Suggested Citation