Tail Risk Dynamics in Stock Returns: Links to the Macroeconomy and Global Markets Connectedness

TY - JOUR

T1 - Tail Risk Dynamics in Stock Returns

T2 - Links to the Macroeconomy and Global Markets Connectedness

AU - Massacci, Daniele

PY - 2017/9/1

Y1 - 2017/9/1

N2 - We propose a new time-varying peaks over threshold model to study tail risk dynamics in equity markets: the laws of motion for the parameters are defined through the score-based approach. We apply the model to daily returns from U.S. size-sorted decile stock portfolios and show that large firms’ tail risk increases during recessions more than small firms’ tail risk. Our results are consistent with the granular hypothesis of aggregate fluctuations, and we quantify the impact of large firms’ tail risk shocks on the economy.A measure of tail connectedness is proposed: evidence from international equity markets shows that tail connectedness increases during periods of turmoil.

AB - We propose a new time-varying peaks over threshold model to study tail risk dynamics in equity markets: the laws of motion for the parameters are defined through the score-based approach. We apply the model to daily returns from U.S. size-sorted decile stock portfolios and show that large firms’ tail risk increases during recessions more than small firms’ tail risk. Our results are consistent with the granular hypothesis of aggregate fluctuations, and we quantify the impact of large firms’ tail risk shocks on the economy.A measure of tail connectedness is proposed: evidence from international equity markets shows that tail connectedness increases during periods of turmoil.

U2 - 10.1287/mnsc.2016.2488

DO - 10.1287/mnsc.2016.2488

M3 - Article

SN - 0025-1909

VL - 63

SP - 3072

EP - 3089

JO - MANAGEMENT SCIENCE

JF - MANAGEMENT SCIENCE

IS - 9

ER -