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Measuring tail risk

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  • Dierkes, Maik
  • Hollstein, Fabian
  • Prokopczuk, Marcel
  • Würsig, Christoph Matthias

Abstract

We comprehensively investigate the usefulness of tail risk measures proposed in the literature. We evaluate their statistical as well as their economic validity. The option-implied measure of Bollerslev and Todorov (2011b) (BT11Q) performs best overall. While some other tail risk measures excel at specialized tasks, BT11Q performs well in all tests: First, BT11Q can predict both future tail events and future tail volatility. Second, it has predictive power for returns in both the time series and the cross-section, as well as for real economic activity. Finally, a simulation analysis shows that the main driver of performance is measurement error.

Suggested Citation

  • Dierkes, Maik & Hollstein, Fabian & Prokopczuk, Marcel & Würsig, Christoph Matthias, 2024. "Measuring tail risk," Journal of Econometrics, Elsevier, vol. 241(2).
    • Handle: RePEc:eee:econom:v:241:y:2024:i:2:s0304407624001155
    DOI: 10.1016/j.jeconom.2024.105769
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    More about this item

    Keywords

    Tail risk; Return forecasting; Tail event forecasting;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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