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The world price of tail risk

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  • Lee, Kuan-Hui
  • Yang, Cheol-Won

Abstract

We examine the pricing of tail risk for 43,000 stocks from 46 countries between 1995 and 2013. We decompose tail risks into those with respect to local and global market returns and find that both risks are independently priced. Due to the increased demand for hedging tail risks, the premia for both tail risks are positively related to globalization. For local tail risk, though not for global tail risk, the premium is high when investor sentiment is low and its sensitivity is limited by globalization, reflecting that investors can diversify away local tail risk, but not global tail risk, globally.

Suggested Citation

  • Lee, Kuan-Hui & Yang, Cheol-Won, 2022. "The world price of tail risk," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21002031
    DOI: 10.1016/j.pacfin.2021.101696
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