The cross-section of tail risks in stock returns

Moore, Kyle and Sun, Pengfei and de Vries, Casper G. and Zhou, Chen (2013): The cross-section of tail risks in stock returns.

Abstract

This paper investigates how the downside tail risk of stock returns is differentiated cross-sectionally. Stock returns follow heavy-tailed distributions with downside tail risk determined by the tail shape and scale. If safety-first investors are concerned with sufficiently large downside losses, i.e. have a sufficiently low risk tolerance, then in the equilibrium, assets traded in the same market share a homogeneous tail shape parameter. Furthermore, if tail shapes are homogeneous, the equilibrium prices of assets are differentiated by the scales.

• Item Type: MPRA Paper
• Language: English
• Keywords: Heavy-tail distribution, safety-first utility, asset pricing
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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