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Idiosyncratic tail risk and expected stock returns: Evidence from the Chinese stock markets

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  • Long, Huaigang
  • Jiang, Yuexiang
  • Zhu, Yanjian

Abstract

We estimate idiosyncratic tail risk according to the extreme value theory. Both portfolio analyses and cross-sectional regressions suggest a significant negative relationship between the idiosyncratic tail risk and the expected returns in Chinese stock markets after controlling for other risk measures including size, book-to-market ratio, beta, momentum, short-term reversals, liquidity, idiosyncratic volatility, downside beta, co-skewness, co-kurtosis, idiosyncratic skewness, idiosyncratic kurtosis, value at risk and maximum daily returns. Turnover explains the negative effect of the idiosyncratic tail risk in Chinese stock markets where individual investors dominate the markets and short sales are constrained.

Suggested Citation

  • Long, Huaigang & Jiang, Yuexiang & Zhu, Yanjian, 2018. "Idiosyncratic tail risk and expected stock returns: Evidence from the Chinese stock markets," Finance Research Letters, Elsevier, vol. 24(C), pages 129-136.
    • Handle: RePEc:eee:finlet:v:24:y:2018:i:c:p:129-136
    DOI: 10.1016/j.frl.2017.07.009
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    7. Asgar Ali & K. N. Badhani, 2023. "Tail risk, beta anomaly, and demand for lottery: what explains cross-sectional variations in equity returns?," Empirical Economics, Springer, vol. 65(2), pages 775-804, August.
    8. Ahamuefula E. Ogbonna & Olusanya E. Olubusoye, 2021. "Tail Risks and Stock Return Predictability - Evidence From Asia-Pacific," Asian Economics Letters, Asia-Pacific Applied Economics Association, vol. 2(3), pages 1-6.
    9. Fracasso, Laís Martins & Müller, Fernanda Maria & Ramos, Henrique Pinto & Righi, Marcelo Brutti, 2023. "Is there a risk premium? Evidence from thirteen measures," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 182-199.
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    More about this item

    Keywords

    Idiosyncratic tail risk; Extreme value theory; Idiosyncratic volatility; Return predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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