Conditional extreme risk, black swan hedging, and asset prices

S. Ghon RHEE; Feng WU

Conditional extreme risk, black swan hedging, and asset prices

S. Ghon RHEE
, Feng WU

Research output: Other Conference Contributions › Conference Paper (other) › Research › peer-review

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 language	English
Number of pages	64
Publication status	Published - 23 Jun 2015
Externally published	Yes
Event	2015 Financial Management Association Asian Meeting - Seoul National University, Seoul, Korea, Republic of Duration: 23 Jun 2015 → 25 Jun 2015 http://www.fmaconferences.org/Seoul/SeoulProgramPrelim.htm

Conference

Conference	2015 Financial Management Association Asian Meeting
Country/Territory	Korea, Republic of
City	Seoul
Period	23/06/15 → 25/06/15
Internet address	http://www.fmaconferences.org/Seoul/SeoulProgramPrelim.htm

Keywords

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

Access to Document

http://www.fmaconferences.org/Seoul/Papers/RheeWu.pdf

Conditional extreme risk, black swan hedging, and asset prices
RHEE, S. G. & WU, F. H., Sept 2020, In: Journal of Empirical Finance. 58, p. 412-435 24 p.
Research output: Journal Publications › Journal Article (refereed) › peer-review

3 Link opens in a new tab Citations (Scopus)

Cite this

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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.",

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N2 - 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.

AB - 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.

KW - Conditional extreme risk

KW - Black swan hedging

KW - Safety-first

KW - Extreme value theory

KW - Asset pricing

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T2 - 2015 Financial Management Association Asian Meeting

Y2 - 23 June 2015 through 25 June 2015

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