Publication Type

Journal Article

Version

acceptedVersion

Publication Date

7-2019

Abstract

We show that the beta with respect to an index of global ex ante tail risk concerns (��ℝ����), which we construct using out-of-the-money options on multiple global assets, negatively drives cross-sectional return variations across asset classes, including international equity indices, foreign currencies, and government bond futures. The pricing power of ��ℝ���� becomes stronger when more asset-class-level tail risk concerns are incorporated in the index construction. ��ℝ���� also dominates asset-class-level tail risk concerns in pricing assets within each asset class. These evidences imply that the pricing effect of tail risk concerns works predominantly as a global channel. The ��ℝ���� pricing effect is distinct from that of tail risk factors based on historical realizations, consistent with the interpretation that tail risk concerns likely reflect investors’ ex ante subjective belief about tail risk.

Keywords

asset class, option, tail risk concerns

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

Areas of Excellence

Growth in Asia

Publication

Management Science

Volume

65

Issue

7

First Page

3111

Last Page

3130

ISSN

0025-1909

Identifier

10.1287/mnsc.2017.2949

Publisher

Institute for Operations Research and Management Sciences

External URL

https://api.elsevier.com/content/abstract/scopus_id/85069157078

Additional URL

https://doi.org/10.1287/mnsc.2017.2949

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