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Can Exposure to Tail Risk Explain Size, Book-to-Market, and Idiosyncratic Volatility Anomalies?

Aboura, Sofiane; Arisoy, Eser (2017), Can Exposure to Tail Risk Explain Size, Book-to-Market, and Idiosyncratic Volatility Anomalies?. https://basepub.dauphine.fr/handle/123456789/16341

Type
Document de travail / Working paper
Date
2017
Publisher
Université Paris-Dauphine
Series title
Cahier de recherche DRM
Published in
Paris
Publication identifier
10.2139/ssrn.2832893
Metadata
Show full item record
Author(s)
Aboura, Sofiane
Centre d'Economie de l'Université Paris Nord (ancienne affiliation) [CEPN]
Arisoy, Eser
Dauphine Recherches en Management [DRM]
Abstract (EN)
We examine the impact of aggregate tail risk on return dynamics of size, book-to-market ratio, and idiosyncratic volatility sorted portfolios. Using changes in VIX Tail Hedge Index (ΔVXTH) as a proxy for aggregate tail risk, and controlling for market, size, book-to-market, and aggregate volatility risk, we document significant portfolio return exposures to tail risk. In particular, portfolios that contain small, value and volatile stocks exhibit consistently positive and statistically significant tail risk betas, whereas portfolios of big, growth and non-volatile stocks exhibit negative tail risk betas. We posit that due to their positive tail risk exposures, tail risk-averse investors demand extra compensation to hold small, value, and high idiosyncratic volatility stocks. Our results offer a tail risk-based explanation to size, value, and idiosyncratic volatility anomalies.
Subjects / Keywords
Tail risk; implied volatility; idiosyncratic volatility; size; value; anomalies
JEL
C40 - General
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G13 - Contingent Pricing; Futures Pricing

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