Is tail risk the missing link between institutions and risk?

Betrand Groslambert, Devraj Basu, Wan-Ni Lai

Research output: Contribution to journalArticlepeer-review

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Abstract

This paper examines the link between risk and institutional quality, an unresolved issue in finance. Our hypothesis is that institutions affect risk through extreme events and not through volatility. We focus on relative tail risk with an original approach that is able to estimate historical tail risk with greater precision. Using international stock market data, we show that tail risk is stable over time, unlike volatility. We find that tail risk captures the relation between risk and institutional quality better than volatility. Better governance substantially reduces the probability of extreme events.
Original languageEnglish
Pages (from-to)1435-1448
Number of pages14
JournalEconomics Bulletin
Volume39
Issue number2
Publication statusPublished - 15 Jun 2019

Keywords

  • tail risk
  • stock markets
  • stock market data

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