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High-Frequency Tail Risk Premium and Stock Return Predictability

René Garcia

Professor of Financial Economics and Quantitative Methods, Université de Montréal | Scientific Director, SKEMA CANADA

We propose a novel measure of the market return tail risk premium based on minimum-distance state price densities recovered from high-frequency data. The tail risk premium extracted from intra-day S&P 500 returns predicts the market equity and variance risk premiums and expected excess returns on a cross section of characteristics- sorted portfolios. Additionally, we describe the differential role of the quantity of tail risk, and of the tail premium, in shaping the future distribution of index returns. Our results are robust to controlling for established measures of variance and tail risk, and of risk premiums, in the predictive models.


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