Time-varying aggregate tail risk and cross-section of stock returns: Indian evidence

This article examines whether the time-varying aggregate tail risk is priced in the cross-section of average returns in the Indian equity market. The results show that the tail risk beta sorted portfolio returns increase monotonically with an increase in their tail risk sensitivity. More importantly, the Indian stocks provide economically and statistically significant risk premium for the tail beta risk factor. The findings remain robust after controlling for the Fama-French and momentum risk factors, and other individual characteristics governing tail behaviour of stocks. The study also provides evidence that institutional ownership and firm size affect tail risk premium.