Title

Tail Risk and Asset Prices in the Short-term

Author(s)

Caio Almeida Caio Almeida (Princeton University)

Gustavo Freire Gustavo Freire (Erasmus University Rotterdam)

René Garcia René Garcia (Université de Montréal)

Rodrigo Hizmeri Rodrigo Hizmeri (University of Liverpool)

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. Our tail risk measure significantly predicts the equity premium and variance risk premium 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.

Creation Date

2023-03

Section URL ID

Paper Number

2023-06

URL

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4216981

File Function

Jel

C58, G12, G17

Keyword(s)

Left tail risk, return predictability, factor models, risk-neutralization, high-frequency data

Suppress

false

Series

13