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Stock market tail risk, tail risk premia, and return predictability
Author(s) -
Suh Sangwon,
Yoo Eungyu,
Yoon SunJoong
Publication year - 2021
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22226
Subject(s) - tail risk , predictability , predictive power , risk premium , stock (firearms) , econometrics , economics , financial economics , equity (law) , portfolio , tail dependence , equity risk , stock market , finance , valuation (finance) , mathematics , statistics , geography , law , philosophy , epistemology , political science , context (archaeology) , archaeology , multivariate statistics
In this study, we use the S&P 500 options prices to derive various tail risk indexes. We then decompose the option‐implied tail risk indexes into the conditional tail risk of stock returns and equity tail risk premia. We examine the predictive power of the conditional tail risks and equity tail risk premia for various stock portfolio returns. The results demonstrate that the tail risk indicators possess additional predictive power for stock returns in the presence of extant risk indicators and other return predictor variables.