Risk premia: asymmetric tail risks and excess returns

Lempérière, Yves; Deremble, Cyril; Nguyen, Trung-Tu; Seager, Philip; Potters, Marc; Bouchaud, Jean‐Philippe

doi:10.1080/14697688.2016.1183035

Cited by 74 publications

(41 citation statements)

References 36 publications

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“…• First, as is now well known, volatility in itself does not entail risk premia, as the Low-Vol anomaly illustrates Ang et al (2009) • Second, the skewness of SMB portfolios is only weakly negative, and those of CMH virtually unskewed, at odds with what one should expect for risk premium strategies (see the extended discussion in Lempérière et al (2017)). …”

Section: Correcting Biases: the Cmh Portfoliomentioning

confidence: 56%

The 'Size Premium' in Equity Markets: Where Is the Risk?

et al. 2017

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We find that when measured in terms of dollar-turnover, and once β-neutralised and Low-Vol neutralised, the Size Effect is alive and well. With a long term t-stat of 5.1, the "Cold-Minus-Hot" (CMH) anomaly is certainly not less significant than other well-known factors such as Value or Quality. As compared to market-cap based SMB, CMH portfolios are much less anti-correlated to the Low-Vol anomaly. In contrast with standard risk premia, size-based portfolios are found to be virtually unskewed. In fact, the extreme risk of these portfolios is dominated by the large cap leg; small caps actually have a positive (rather than negative) skewness. The only argument that favours a risk premium interpretation at the individual stock level is that the extreme drawdowns are more frequent for small cap/turnover stocks, even after accounting for volatility. This idiosyncratic risk is however clearly diversifiable.

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Section: Correcting Biases: the Cmh Portfoliomentioning

confidence: 56%

The 'Size Premium' in Equity Markets: Where Is the Risk?

et al. 2017

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“…In other words, the performance appears to become worse than average in periods of high market volatility: at least in aggregate, hedge funds have difficulty fulfilling their promises in terms of tail diversification (see [3] for a detailed analysis of hedge fund performance). A related observation was made in [4], where it was shown that the performance of the HFRI Index has a significant skewness, making its performance akin to that of shorting volatility.…”

Section: Introductionmentioning

confidence: 87%

“…The skewness of the profit and loss distribution of a given strategy was recently proposed as a natural discriminant between risk premia strategies and genuine market anomalies (see [4] for a thorough discussion). Several previous papers have pointed out that the skewness of trend following is positive (see [16,17], and [18] for a general framework), at variance with risk premia that have a negative skewness.…”

Section: Skewness Of Trend Following Strategiesmentioning

confidence: 99%

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Tail Protection for Long Investors: Trend Convexity at Work

et al. 2016

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The performance of trend following strategies can be ascribed to the difference between long-term and short-term realized variance. We revisit this general result and show that it holds for various definitions of trend strategies. This explains the positive convexity of the aggregate performance of Commodity Trading Advisors (CTAs) which -when adequately measured -turns out to be much stronger than anticipated. We also highlight interesting connections with so-called Risk Parity portfolios. Finally, we propose a new portfolio of strangle options that provides a pure exposure to the longterm variance of the underlying, offering yet another viewpoint on the link between trend and volatility.

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“…However, while well-known risk premia strategies are indeed rewarding investors for carrying a significant negative skewness risk (see e.g. Harvey and Siddique (2000), Lemperiere et al (2014)), quality strategies are in fact found to have a positive skewness and a very small propensity to crash -see (1) ( This table describes the risk-return profile of 8 well-known quantitative long-short strategies and long the market itself, using monthly returns. See Appendix for details on data, signal, and portfolio construction.…”

Section: Risk Premium or Behavioral Anomaly?mentioning

confidence: 99%

The Excess Returns of 'Quality' Stocks: A Behavioral Anomaly

Bouchaud

Ciliberti

Landier³

et al. 2016

SSRN Journal

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This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure. This view is consistent with the Efficient Market Hypothesis. The other view is the "behavioral view", which states that some investors persistently underestimate the true value of high quality firms. We find no evidence in favor of the "risk view": The returns from investing in quality firms are abnormally high on a riskadjusted basis, and are not prone to crashes. We provide novel evidence in favor of the "behavioral view": In their forecasts of future prices, and while being overall overoptimistic, analysts systematically underestimate the future return of high quality firms, compared to low quality firms. *

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Risk premia: asymmetric tail risks and excess returns

Cited by 74 publications

References 36 publications

The 'Size Premium' in Equity Markets: Where Is the Risk?

The 'Size Premium' in Equity Markets: Where Is the Risk?

Tail Protection for Long Investors: Trend Convexity at Work

The Excess Returns of 'Quality' Stocks: A Behavioral Anomaly

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