Conditional extreme risk, black swan hedging, and asset prices

S. Ghon RHEE, Feng WU

Research output: Other Conference ContributionsConference Paper (other)Researchpeer-review


Motivated by asset pricing theory with safety-first preference, we introduce and operationalize an ex ante conditional extreme risk (CER) measure which describes expected stock performance conditional on a potential small-probability market downturn (black swan). CER is positively priced in the cross-section of stock returns, especially when large-scale market calamities are predicted. It also largely subsumes the premia to downside beta, coskewness, and cokurtosis. Different from co-crash-based tail dependence measures, CER provides extra information regarding black swan hedging when the market plunges but the individual stock does not, and it has a greater impact on asset prices among stocks with the black swan hedging property manifesting more prominently.
Original languageEnglish
Number of pages64
Publication statusPublished - 23 Jun 2015
Externally publishedYes
Event2015 Financial Management Association Asian Meeting - Seoul National University, Seoul, Korea, Republic of
Duration: 23 Jun 201525 Jun 2015


Conference2015 Financial Management Association Asian Meeting
Country/TerritoryKorea, Republic of
Internet address


  • Conditional extreme risk
  • Black swan hedging
  • Safety-first
  • Extreme value theory
  • Asset pricing

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