Tail risk dynamics in equity markets: estimation, implications, and predictive power of conditional tail indexes

Abstract

This work project investigates the significance of tail risk in U.S. and European financial markets, focusing on stock-specific tail indexes and their implications for asset pricing and return predictability. Utilizing a flexible framework based on ordinary least squares (OLS), the work project estimates these tail indexes while incorporating various macroeconomic and financial covariates. By evaluating the risk premium and the predictive power of the tail indexes, this research contributes valuable insights into how financial risks affect market prices. The main finding of the analysis is the discovery of a significant tail risk premium for European stocks.