Tail Risk in the Cross Section of Alternative Risk Premium Strategies

Journal of Portfolio Management, Vol. 45, No. 2, 2018, https://jpm.pm-research.com/content/45/2/93

Posted: 16 Aug 2018 Last revised: 5 Oct 2019

See all articles by Nick Baltas

Nick Baltas

Imperial College Business School; Goldman Sachs International

Bernd Scherer

EDHEC Business School - Department of Economics & Finance

Date Written: October 22, 2018

Abstract

In this article the authors attempt to get a better understanding of the cross-section of alternative risk premia using a multi-asset version of the downside risk CAPM. In line with the empirical literature, they find that the cross-section of realized returns is much better explained when using the downside risk CAPM, rather than relying on the traditional CAPM. However, in contrast to the empirical literature, the authors cannot always recover the required signs in their cross-sectional regressions. In particular, we find that taking on downside risk is not always systematically rewarded. This might either be due to the limited availability of time series that essentially overweight the exceptional events of 2008 or a direct result of creating back-tests with attractive in-sample features that are impossible to be repeated out-of-sample.

Keywords: Alternative Risk Premia, Tail Risk, Downside CAPM

JEL Classification: G11, G12, G14, C21

Suggested Citation

Baltas, Nick and Baltas, Nick and Scherer, Bernd, Tail Risk in the Cross Section of Alternative Risk Premium Strategies (October 22, 2018). Journal of Portfolio Management, Vol. 45, No. 2, 2018, https://jpm.pm-research.com/content/45/2/93, Available at SSRN: https://ssrn.com/abstract=3225032 or http://dx.doi.org/10.2139/ssrn.3225032

Nick Baltas

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom

Goldman Sachs International

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom

Bernd Scherer (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

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