Abstract
Highlights
•We investigate the role of the average risk across stocks in predicting subsequent market returns.
•As risk measures, we consider variance, skewness, kurtosis and value at risk.
•Average tail risk has significant predictive ability after controlling for market tail risk.
•Average tail risk dominates the other measures of average risk.
Abstract
We investigate the role of the average risk across stocks in predicting subsequent market returns using measures of risk that capture the higher moments of the return distribution including variance, skewness and kurtosis, as well as measures of tail risk that combine these. We find that average tail risk has statistically and economically significant predictive ability for market returns, even after controlling for market tail risk, suggesting that average idiosyncratic tail risk contains information about future returns. Average tail risk dominates other measures of average risk that have been documented in the literature, such as variance and skewness. Our results are robust to the inclusion of control variables that capture business cycle effects, and to the use of different measures of tail risk.
•We investigate the role of the average risk across stocks in predicting subsequent market returns.
•As risk measures, we consider variance, skewness, kurtosis and value at risk.
•Average tail risk has significant predictive ability after controlling for market tail risk.
•Average tail risk dominates the other measures of average risk.
Abstract
We investigate the role of the average risk across stocks in predicting subsequent market returns using measures of risk that capture the higher moments of the return distribution including variance, skewness and kurtosis, as well as measures of tail risk that combine these. We find that average tail risk has statistically and economically significant predictive ability for market returns, even after controlling for market tail risk, suggesting that average idiosyncratic tail risk contains information about future returns. Average tail risk dominates other measures of average risk that have been documented in the literature, such as variance and skewness. Our results are robust to the inclusion of control variables that capture business cycle effects, and to the use of different measures of tail risk.
| Original language | English |
|---|---|
| Article number | 101699 |
| Number of pages | 15 |
| Journal | Journal of International Financial Markets, Institutions and Money |
| Volume | 82 |
| Early online date | 30 Nov 2022 |
| DOIs | |
| Publication status | Published - 1 Jan 2023 |
Bibliographical note
Publisher Copyright:© 2022 The Author(s)
Research Groups and Themes
- AF Financial Markets