The impact of equity tail risk on European markets

• Autor(a) principal: Conduto, Miguel dos Prazeres
• Data de Publicação: 2023
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositórios Científicos de Acesso Aberto de Portugal (RCAAP)
• Texto Completo: http://hdl.handle.net/10362/154018
• topic: Tail risk; Risk aversion; Equity markets; Government bonds; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

I apply a dynamic equity tail risk variable to equity and government bond returns in Europe, understanding how investors react upon an increase in market uncertainty, departing from a risk aversion premise. I show that tail risk has predictive power for market returns, but less significantly than in the US. Nevertheless, the cross-sectional analysis provides evidence that investors demand a higher return from stocks that co-move more with tail risk, and the government bond analysis demonstrates that the yield-to maturity of safer bonds decreases upon an increase in equity tail risk, a sign of investors’ flight to safety, in uncertain times.