A0748
Title: Spurious tail risk factors and asset prices
Authors: Maxime Nicolas - University College London (United Kingdom) [presenting]
Abstract: It is argued that recent findings on the predictive ability of tail risk exposure are likely spurious. We argue that these results are related to biases in the estimation procedure of the tail dependence coefficient (TDC) computed based on the joint behavior of equity returns, market returns, or other factors. Backed by a simulation framework, we show how this coefficient may capture a high level of correlation rather than asymptotic dependence. Then, we replicate recent studies finding a relationship between crash risk exposure and future excess returns. We proceed to show that these results do not hold when we control for the correlation coefficient and other past return behavior.
