This paper extends the extreme downside correlation (EDC) and extreme downside hedge (EDH) methodology to model the interdependence in the sensitivity of assets to the downside risk of other financial assets under severe firm-level and market conditions. The model is applied to analyze both...

To solve the dependency problem between factors, in the context of linear multi-factor models, this study proposes an optimal procedure to find orthogonalized risk premia, which also facilitates the decomposition of the coefficient of determination. Importantly, the new risk premia may diverge...

In the context of linear multi-factor models, this study proposes an egalitarian, optimal and unique procedure to find orthogonalized factors, which also facilitates the decomposition of the coefficient of determination. Importantly, the new risk factors may diverge significantly from the...

This paper investigates whether multivariate crash risk (MCRASH), defined as exposure to extreme realizations of multiple systematic factors, is priced in the cross-section of expected stock returns. We derive an extended linear model with a positive premium for MCRASH and we empirically confirm...

This paper investigates whether multivariate crash risk is priced in the cross- section of expected stock returns. Motivated by a theoretical asset pricing model, we capture the multivariate crash risk of a stock by a combined measure based on its expected shortfall and its multivariate lower...

One of the fundamental requirements of investment management is the ability to assess risk and to adjust exposure to control tail risk, the risk of larger than acceptable losses. Since the onset of the recent credit crisis, the effects of widespread failure of standard techniques for tail risk...

We test for the presence of a systematic tail risk premium in the cross-section of expected returns by applying a measure on the sensitivity of assets to extreme market downturns, the tail beta. Empirically, historical tail betas help to predict the future performance of stocks under extreme...

We develop a utility and asset pricing theory that features a novel measure of tail risk. Our model determines investor demand for both left and right-tail risk premia from an indifference curve incorporating tolerance for variance and tail risk. We show that the systematic tail risk factors...

The dangers of shouting ``fire'' in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features, and I analyze why people crowd into theaters and trades, why they run, what determines the...