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Can tail risk explain size, book‐to‐market, momentum, and idiosyncratic volatility anomalies?
Author(s) -
Aboura Sofiane,
Arisoy Y. Eser
Publication year - 2019
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12403
Subject(s) - volatility (finance) , systematic risk , economics , portfolio , econometrics , financial economics , tail risk , volatility risk , momentum (technical analysis) , capital asset pricing model , stock (firearms) , volatility risk premium , implied volatility , geography , archaeology
We examine the impact of tail risk on the return dynamics of size, book‐to‐market ratio, momentum and idiosyncratic volatility sorted portfolios. Our time‐series analyses document significant portfolio return exposures to aggregate tail risk. In particular, portfolios that contain small, value, high idiosyncratic volatility and low momentum stocks exhibit negative and statistically significant tail risk betas. Our cross‐sectional analyses at the individual stock level suggest that tail risk helps in explaining the four pricing anomalies, particularly size and idiosyncratic volatility anomalies.