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Aggregate Tail Risk and Expected Returns

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  • David A Chapman
  • Michael F Gallmeyer
  • J Spencer Martin

Abstract

Do stocks bear a crash risk premium? We examine the empirical performance of the tail index measure from Kelly and Jiang (2014). We find that the tail index explains the cross-section of the discount rate component of returns, but not the cash-flow component. Moreover, in the time series the tail index is uncorrelated with theoretically motivated measures of aggregate uncertainty and systemic risk. In contrast, the tail index Granger causes and is Granger caused by the level of the term structure, and the slope of the term structure Granger causes tail risk.Received June 22, 2016; editorial decision December 23, 2017 by Editor Raman Uppal.

Suggested Citation

  • David A Chapman & Michael F Gallmeyer & J Spencer Martin, 2018. "Aggregate Tail Risk and Expected Returns," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 8(1), pages 36-76.
    • Handle: RePEc:oup:rasset:v:8:y:2018:i:1:p:36-76.
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    File URL: http://hdl.handle.net/10.1093/rapstu/ray002
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    Cited by:

    1. Prodosh Simlai, 2021. "Accrual mispricing, value-at-risk, and expected stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1487-1517, November.
    2. Zhijun Hu & Ping‐Wen Sun, 2021. "Connectedness among stocks and tail risk: Evidence from China," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1179-1202, December.
    3. Bai, Jennie & Goldstein, Robert S. & Yang, Fan, 2020. "Is the credit spread puzzle a myth?," Journal of Financial Economics, Elsevier, vol. 137(2), pages 297-319.

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