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Is tail risk priced in the cross-section of international stock index returns?

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  • Aleksander Mercik

Abstract

This study examines the predictive power of tail risk measures in stock indices returns using a comprehensive dataset covering 50 countries from 1926 to 2021. Our findings reveal that tail risk measures exhibit predictive power when considered independently. However, their forecasting abilities disappear when other risk and return factors are incorporated. This suggests that tail risk measures do not contain incremental information about the cross-section of stock returns beyond the commonly used global factors. Our findings are robust across various considerations, holding for alternative tail risk measure types, estimation periods, and different control variables subsets.

Suggested Citation

  • Aleksander Mercik, 2023. "Is tail risk priced in the cross-section of international stock index returns?," Modern Finance, Modern Finance Institute, vol. 1(1), pages 17-29.
    • Handle: RePEc:bdy:modfin:v:1:y:2023:i:1:p:17-29:id:7
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    References listed on IDEAS

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    1. George P. Gao & Xiaomeng Lu & Zhaogang Song, 2019. "Tail Risk Concerns Everywhere," Management Science, INFORMS, vol. 65(7), pages 3111-3130, July.
    2. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
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