Systematic Tail Risk

Abstract

We propose new systematic tail risk measures constructed using two different approaches. The first extends the canonical downside beta and co-moment measures, while the second is based on the sensitivity of stock returns to innovations in market crash risk. Both tail risk measures are associated with a significantly positive risk premium after controlling for other measures of downside risk, including downside beta, co-skewness and co-kurtosis. Using these measures, we examine the relevance of the tail risk premium for investors with different investment horizons.

Keywords: Asset Pricing, Downside Risk, Tail Risk, Co-Moments, Value at Risk, Systematic Risk

JEL Classification: C13, C31, C58, G01, G10, G12