Navigating the tails

Abstract

This study applies the methodology proposed by Faias (2023) to estimate cross-sectional tail risk SCSTR in the Korean market, and compares it with the similar previous tail risk measure CSTR, proposed by Kelly and Jiang (2014). The findings prove that SCSTR is a more precise representation of monthly tail risk and serves as a superior predictor of future market movement. It consistently demonstrates robust predictive power in the Korean market from 1999 to 2022, unaffected by economic conditions or investment horizon, and further verifies its effectiveness as a risk indicator by providing evidence of a positive premium. Additionally, SCSTR adds economic value by accurately predicting systematic risk beyond the scope of the financial market.