Title: Short-term predictability and the cross-section of stock returns
Authors: Romeo Tedongap - ESSEC Business School Paris-Singapore (France)
Bastien Buchwalter - ESSEC Business School (France) [presenting]
Johannes Breckenfelder - European Central Bank (Germany)
Abstract: A novel decomposition of the realized variance into four components is developed: downside tail, downside core, upside core and upside tail realized variance. We show that these measures of market uncertainty are able to predict the excess market return on a monthly basis. We further show that the realized tail variance and realized tail asymmetry, which are defined as the sum and the difference of the upside and downside tail realized variance, respectively, are priced in the cross-section of stock returns. Our findings suggest that uncertainty averse investors demand extra compensation in form of a higher return to hold the stocks that positively relate to (downside) tail market uncertainty.