Tail Risk in Asset Returns



Do downside tail risk and euphoria risk fetch a premium or discount in pricing of individual assets? To address this question a measure of downside tail risk and euphoria risk, derived from statistical extreme value theory, are constructed. These are used in cross-sectional asset pricing regressions of CAPM and the Fama-French factors. The measures are non-parametric and the number of order statistics to be used in the analysis is based on the Kolmogorov-Smirnov distance. As far as I know, this methodology has not been used for determining the optimal sample fraction in estimating the tail index. It is found that only downside tail risk fetches a significant premium of 0.85% on average.
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Sebastian Gryglewicz                          Agnieszka Markiewicz
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