Can Exposure to Tail Risk Explain Size, Book-to-Market, and Idiosyncratic Volatility Anomalies?

Sofiane Aboura (1) , Eser Arisoy (2)

1 CEPN - Centre d'Economie de l'Université Paris Nord (ancienne affiliation)
2 DRM - Dauphine Recherches en Management

We examine the impact of aggregate tail risk on return dynamics of size, book-to-market ratio, and idiosyncratic volatility sorted portfolios. Using changes in VIX Tail Hedge Index (ΔVXTH) as a proxy for aggregate tail risk, and controlling for market, size, book-to-market, and aggregate volatility risk, we document significant portfolio return exposures to tail risk. In particular, portfolios that contain small, value and volatile stocks exhibit consistently positive and statistically significant tail risk betas, whereas portfolios of big, growth and non-volatile stocks exhibit negative tail risk betas. We posit that due to their positive tail risk exposures, tail risk-averse investors demand extra compensation to hold small, value, and high idiosyncratic volatility stocks. Our results offer a tail risk-based explanation to size, value, and idiosyncratic volatility anomalies.

Mots clés: Tail risk; implied volatility; idiosyncratic volatility; size; value; anomalies

Domaines: Gestion et management

Sofiane Aboura, Eser Arisoy. Can Exposure to Tail Risk Explain Size, Book-to-Market, and Idiosyncratic Volatility Anomalies?. 2017. ⟨hal-01529356⟩