This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2024
  4. Program
  5. Asset Pricing: Volatility, Tail Risk
« Back to Results

Asset Pricing: Volatility, Tail Risk

Paper Session

Sunday, Jan. 7, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Grand Ballroom Salon C
Hosted By: American Finance Association
  • Chair: Nina Boyarchenko, Federal Reserve Bank of New York

Realized Illiquidity

Demetrio Lacava
,
Luiss Guido Carli University
Angelo Ranaldo
,
University of St. Gallen
Paolo Santucci de Magistris
,
Luiss Guido Carli University

Abstract

Realized illiquidity is the ratio between realized volatility and trading volume refining the popular price impact measure proposed by Amihud (2002). We provide its theoretical foundation in which both price volatility, sigma(t), and market liquidity, l(t), follow stochastic processes in continuous time. We prove that the realized illiquidity is a precise measurement of the inverse of integrated liquidity, that is, the integral of l(t) over periods of unit length (e.g., a day). A comprehensive econometric analysis highlights the main distributional and dynamic properties of the realized illiquidity, including jumps, clustering, and leverage effects, and demonstrate that they help explain the time series of stock and currency returns.

Tail Risk and Asset Prices in the Short-Term

Caio Almeida
,
Princeton University
Gustavo Freire
,
Erasmus School of Economics
Rene Garcia
,
University of Montreal
Rodrigo Hizmeri
,
University of Liverpool

Abstract

We combine high-frequency stock returns with risk-neutralization to extract the
daily common component of tail risks perceived by investors in the cross-section
of firms. Our tail risk measure significantly predicts the equity premium and variance
risk premium at short-horizons. Furthermore, a long-short portfolio built by
sorting stocks on their recent exposure to tail risk generates abnormal returns with
respect to standard factor models. Incorporating investors’ preferences via risk-neutralization
is fundamental to our findings: the predictive power of the physical
tail risk is weaker and generally subsumed by its risk-neutral counterpart.

The Hairy Premium

Ljubica Georgievska
,
University of California-Los Angeles
Anthony Saunders
,
New York University
Zhaneta Tancheva
,
BI Norwegian Business School
Pasquale Della corte
,
Imperial College London

Abstract

This paper explores a puzzle originating from the market’s persistent tendency to overestimate future spot rates, as evidenced by consistently overshooting forward rates. This results in unusually high positive long-term returns on net zero investments. We introduce the Hairy premium to quantify this puzzle. Since the 1990s, the 10-year US Hairy premium has averaged 3% p.a., ranging between 4.8% maximum and 1.1% minimum, consistently above 0, indicating asymmetric risk-reward. The Hairy premium spans over a century and it is a global phenomenon across G11 countries. About 45% is explained by a single global factor. While 14% of its variance is attributable to conventional term premiums, unlike them, it exhibits countercyclical dynamics, relating positively to recessions and inflation expectations, thus providing hedge during bad times. We show that a general equilibrium model with persistent degree of short-termism, motivated by interest rate swaps market structure and recent survey evidence, can explain the existence and dynamics of the Hairy premium.

Discussant(s)
Or Shachar
,
Federal Reserve Bank of New York
Nicola Fusari
,
Johns Hopkins University
Leonardo Elias
,
Federal Reserve Bank of New York
JEL Classifications
  • G1 - General Financial Markets