SMU SOE Seminar Series (October 21, 2024): The Granular Origins of Tail Dispersion Risk in the Cross-Section of Asset Prices

TOPIC:

ABSTRACT

We study tail risk in the cross-section of asset prices at high frequencies. The tail behavior of the cross-section depends on whether a systematic jump event occurred. If so, the cross-sectional return tail is governed by assets’ exposures to the systematic event while, otherwise, it is determined by idiosyncratic jumps. An estimator for the tail shape of the cross-sectional distribution displays distinct properties with and without systematic jumps. We show empirically that shocks to the cross-sectional tail shape are a source of priced risk: fat idiosyncratic tails are favored by investors, while fat-tailed exposures to systematic jumps are disliked.

Keywords: Cross-Sectional Asset Pricing, Dispersion, High-Frequency Data, Power Law, Tail Risk.

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