Conditional extreme risk, black swan hedging, and asset prices

S. Ghon RHEE, Feng WU

Research output: Other Conference ContributionsConference Paper (other)

Abstract

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
http://www.fmaconferences.org/Seoul/SeoulProgramPrelim.htm

Conference

Conference2015 Financial Management Association Asian Meeting
CountryKorea, Republic of
CitySeoul
Period23/06/1525/06/15
Internet address

Keywords

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

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  • Research Output

    • 1 Journal Article (refereed)

    Conditional extreme risk, black swan hedging, and asset prices

    RHEE, S. G. & WU, F. H., Sep 2020, In : Journal of Empirical Finance. 58, p. 412-435 24 p.

    Research output: Journal PublicationsJournal Article (refereed)

  • Cite this

    Ghon RHEE, S., & WU, F. (2015). Conditional extreme risk, black swan hedging, and asset prices. Paper presented at 2015 Financial Management Association Asian Meeting, Seoul, Korea, Republic of. http://www.fmaconferences.org/Seoul/Papers/RheeWu.pdf