Working Paper: NBER ID: w19460
Authors: Turan G. Bali; Nusret Cakici; Robert F. Whitelaw
Abstract: We introduce a new, hybrid measure of stock return tail covariance risk, motivated by the under-diversified portfolio holdings of individual investors, and investigate its cross-sectional predictive power. Our key innovation is that this covariance is measured across the left tail states of the individual stock return distribution, not across those of the market return as in standard systematic risk measures. We document a positive and significant relation between hybrid tail covariance risk (H-TCR) and expected stock returns, with an annualized premium of 9%, in contrast to the insignificant or negative results for purely stock-specific or systematic tail risk measures.
Keywords: Tail Risk; Expected Returns; Hybrid Tail Covariance Risk
JEL Codes: C13; G10; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hybrid tail covariance risk (HTCR) (C58) | expected stock returns (G17) |
| systematic risk (G12) | expected stock returns (G17) |
| stock-specific risk (G12) | expected stock returns (G17) |