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Is macroeconomic tail risk contagious to stock idiosyncratic risk?

Author

Listed:
  • Yao, Shouyu
  • Liu, Zezhong
  • Wang, Chunfeng
  • Palma, Alessia
  • Goodell, John W.

Abstract

We explore whether macroeconomic tail risk (MTR) is contagious at the individual stock level. We find that macroeconomic tail risk exacerbates stock idiosyncratic volatility. An increase in macroeconomic tail risk by one standard deviation is associated with an average increase in idiosyncratic volatility by 5.10%. Further, divergence of opinion intensifies the macro to stock idiosyncratic risk contagion. Results show that the positive impact of macroeconomic tail risk on idiosyncratic volatility is only observed in assets with positive MTR beta, indicating that risk-averse hedging trading behavior of investors during macroeconomic downturns is the potential reason for the macro-individual risk contagion.

Suggested Citation

  • Yao, Shouyu & Liu, Zezhong & Wang, Chunfeng & Palma, Alessia & Goodell, John W., 2024. "Is macroeconomic tail risk contagious to stock idiosyncratic risk?," Finance Research Letters, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:finlet:v:63:y:2024:i:c:s1544612324002599
    DOI: 10.1016/j.frl.2024.105229
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    More about this item

    Keywords

    Macroeconomic tail risk; Idiosyncratic risk; Divergence of opinion; Investor behavior;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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