Systematic tail risk

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 16 December 2016

Working Paper No. 637
By Richard D F Harris, Linh H Nguyen and Evarist Stoja 

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.

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