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Tail Risk Concerns Everywhere∗

George P. Gao†, Xiaomeng Lu‡, Zhaogang Song§

June 7, 2017

Abstract
We show that the beta with respect to an index of global ex-ante tail risk concerns (GRIX), which
we construct using out-of-the-money options on multiple global assets, negatively drives cross-
sectional return variations across asset classes, including international equity indices, foreign
currencies, and government bond futures. The pricing power of GRIX becomes stronger when
more asset-class-level tail risk concerns are incorporated in the index construction. GRIX also
dominates asset-class-level tail risk concerns in pricing assets within each asset class. These
evidence implies that the pricing effect of tail risk concerns works predominantly as a global
channel. The GRIX pricing effect is distinct from that of tail risk factors based on historical
realizations, consistent with the interpretation that tail risk concerns likely reflect investors’
ex-ante subjective belief about tail risk.

Keywords: Asset Class; Bond; Currency; Equity; Option; Tail Risk Concerns
JEL Classifications: G12, G13, F37


We thank Neng Wang (editor) and two anonymous referees for suggestions that significantly improved the paper.
We also thank Torben Andersen, Warren Bailey, Gurdip Bakshi, Federico Bandi,Geert Beakert, Tarun Chordia,
John Cochrane, Nicola Fusari, Xavier Gabaix, Gerard Hoberg, Bob Jarrow, Susan Ji, Pete Kyle, Erica Li, Matteo
Maggiori, Ian Martin, Pam Moulton, Gideon Saar, Lawrence Schmidt, Zhongzhi Song, Marti Subrahmanyam, Hiro
Tanaka, Allan Timmerman, Jessica Wachter, Wei Xiong, Fan Yang, Jianfeng Yu, seminar and conference participants
at CUHK, CKGSB, Cornell, Federal Reserve Board, HKUST, Johns-Hopkins, NUS, HKU, Maryland, Nebraska-
Lincoln, Xiamen University, and the 2014 CICF, the 24th CFEA, the 2014 Summer Institute of Finance in China,
the 2014 NBER Summer Institute (EFWW), the 2014 NBER Universities Research Conference, the 2014 FMA
Napa Conference, the 2014 Annual Conference in International Finance, the 2015 SFS Finance Cavalcade, and our
discussants Kewei Hou, Alan Moreira, Anthony Neuberger, Dmitriy Sergeyev, Mary Tian, and Yingzi Zhu for helpful
discussions. We are grateful to Kim Zhang for excellent research assistance, and to Bryan Kelly and Viktor Todorov
for kindly sharing their measures of tail risk. Financial support from the 2013 GARP Risk Management Research
Program is gratefully acknowledged. All opinions and inferences are attributable to the authors and do not represent
the views of T. Rowe Price Associates, Inc.

T. Rowe Price and The College of Business at Cornell University, Email: george gao@troweprice.com.

Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Email: xmlu@saif.sjtu.edu.cn.
§
The Johns Hopkins Carey Business School, Email: zsong8@jhu.edu.

Electronic copy available at: https://ssrn.com/abstract=2606345


1 Introduction

Understanding expected returns across multiple asset classes is fundamentally important, both for

practitioners to manage global investment portfolios and for academics to enhance asset pricing

theories by moving beyond the convention of studying various markets in isolation. However,

uncovering the common variation of global asset returns is not easy because different markets have

substantially different participants, market structures, and risk-return profiles. In this paper, we

seek to systematically characterize the asset returns across asset classes under the framework of

tail risk, motivated by the fact that all asset classes exhibit strong price variations simultaneously

in stressful times, e.g., the 2007-2008 global financial crisis.

To conduct our analysis, we first construct a model-free measure of global tail risk using a

comprehensive set of out-of-the-money options on major global assets, including international equity

indices, foreign currencies, and government bond futures, from 1996 through 2012. Such a measure,

based on option prices, has two advantages at least. First, it is not subject to the limited time-series

sample of realized tail events, which are rare by default, in capturing the time-varying nature of tail

risk. Second, as option prices are forward-looking, our tail risk measure captures investors’ ex-ante

perception of tail risk, which we hence dub as tail risk concerns index (RIX), to borrow from the

speech by the former Chairman of the Federal Reserve, Ben Bernanke, at the FRB Kansas City

Economic Symposium on August 31, 2012: “Such signaling [of Large-scale asset purchases] can also

increase household and business confidence by helping to diminish concerns about ‘tail’ risks”.

Specifically, for each individual asset, the RIX index is equal to a weighted sum of out-of-the-

money options of different moneyness, which is effectively a disaster insurance price under only

no-arbitrage conditions (Gao et al. (2017)). Then, we take the simple average of individual RIXs

within each asset class as the asset-class-level RIX. Finally, we extract the first principal component

of the correlation matrix of the three asset-class-level RIXs as our global tail risk concerns index,

denoted as GRIX.1 The GRIX time series show that investors’ tail risk concerns escalated in the

1997 Asian financial crisis, the 9/11 terrorist attack in 2001, the stock market downturn in 2002,

and the 2008 global financial crisis, as well as, interestingly, the stock market rally in October 2011.

The main contribution of the paper is to document the explanatory power of global tail risk
1
Asness et al. (2013) use a similar approach in constructing global value and momentum factors.

Electronic copy available at: https://ssrn.com/abstract=2606345


concerns for cross-sectional return variations across three asset classes, specifically, 30 international

equity indices, 32 foreign currencies, and 14 global government bond futures. In particular, we

estimate an asset’s exposure with respect to the innovation in global tail risk concerns, i.e., the

GRIX-β. Then, we rank all 76 global investment assets into five GRIX-β quintiles. Consistent with

tail risk being priced, we find that low GRIX-β assets (that are more risky because they deliver low

returns when the market’s tail risk concerns spike) on average earn higher expected excess returns

than high GRIX-β assets. At the monthly and quarterly frequencies of portfolio formation, the

low-minus-high GRIX-β portfolios on average earn 0.95% and 0.69% per month, with Newey-West

t-statistics of 3.45 and 2.89, respectively.

These return variations driven by the GRIX-β are not attributed to global market, value, mo-

mentum, time series momentum, and betting-against-beta factors (Asness et al. (2013); Moskowitz

et al. (2012); Frazzini and Pedersen (2014)). For example, the abnormal return or alpha of monthly

formed hedge portfolios against these global factors is 0.77% (t-stat = 2.71). Furthermore, both low

and high GRIX-β portfolios contain assets from multiple asset classes, and the asset composition

varies over time in response to time-varying tail risk concerns about the global financial market.

We further conduct two tests to show that the pricing power of tail risk concerns works pre-

dominantly as a global channel. First, using the cross section of all 76 global assets, we show that

the pricing power becomes stronger when more asset-class-level tail risk concerns are incorporated

in the GRIX construction, which helps purge noises and asset-class-specific factors. For example,

the monthly return spread of the quintile portfolio based on EQRIX is 0.73% (t = 2.75), and that

based on the common component of EQRIX and BDRIX is 0.81% (t = 3.73), both lower than the

return spread of 0.95% (t = 3.45) based on GRIX. Second, using the cross section of assets within

each of the three asset classes separately, we show that the pricing power of GRIX subsumes the

pricing power of each asset-class-level tail risk concerns factor. For example, we decompose EQRIX

into a component driven by the GRIX, and an orthogonal component, by regressing EQRIX on

GRIX. We find that the pricing power of EQRIX for the cross sectional of equity indices all comes

from the component associated with GRIX, and the orthogonal component that is specific to each

asset class has no pricing effect.

Moreover, in exploring the specific economic mechanisms behind the pricing power of global tail

risk concerns, we compare the effect of GRIX with that of the tail risk factor proposed in Kelly and

Electronic copy available at: https://ssrn.com/abstract=2606345


Jiang (2014) (KJ). Specifically, Kelly and Jiang (2014) construct a tail risk factor by an innovative

approach using the large cross section of individual stock returns. The major difference of our

GRIX factor from the KJ factor is that our option-based factor captures the ex ante subjective

belief of tail risk that may not be associated with the tail event shocks, whereas the KJ factor

captures the tail risk from the ex post realizations of tail events. The horse race analysis shows

that the GRIX-β effect is indeed distinctive from that of the KJ factor, suggesting that global tail

risk concerns likely reflect investors’ ex-ante subjective belief about tail risk.

Finally, we conduct a few additional analyses and robustness checks. First, we collect a large set

factors of liquidity/funding constraints of financial intermediaries, and show that the exposure to

these factors cannot explain the asset return predictability driven by the global tail risk concerns.

Second, we also investigate the pricing power of global tail risk concerns in developed vs emerging

markets. We rank assets into five GRIX-β quintiles, within the set of assets from developed markets

and within the set of assets from emerging markets, separately. We find that the high and low

GRIX-β assets in emerging markets have a larger difference in the beta, as well as a larger return

spread, than those in developed markets. Finally, we show the pricing effect of global tail risk

concerns is robust to alternative constructions of the GRIX measure, including the value-weighted

GRIX by GDP, the simple average of the asset-class-level tail risk concerns measures, and the net

tail measure based on both put and call options.

Our paper mainly contributes to the growing literature of asset pricing across multiple markets.

Complementing prior studies that document intriguing characteristic-based return anomalies across

asset classes (Asness et al. (2013); Koijen et al. (2017); Moskowitz et al. (2012)), we document a

risk-based explanation for expected asset returns across markets. Along this direction, Lettau et al.

(2014) is the first to propose a covariance-based framework for understanding returns across asset

classes based on downside market risk. We differ by documenting the capability of time-varying

tail risk to unify “how discount rates vary over time and across assets”(Cochrane (2011)).

Our paper also contributes to the literature of asset pricing with tail risk or disaster risk.

Theoretical explanation includes the rare disaster risk of economic fundamentals in Rietz (1988),

Barro (2006), Gabaix (2012), Wachter (2013), Gourio (2008), and Farhi and Gabaix (2016), the

subjective perception in Weitzman (2007), and the biased belief of tail risk in Barberis (2013),

Gennaioli et al. (2012), and Baron and Xiong (2017). We contribute to this literature by showing

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that assets’ sensitivity to global tail risk concerns is one important determinant of cross-sectional

return variations across multiple asset classes.

2 Measure and Data

2.1 The Option-Based Measure of Tail Risk Concerns

Following the approach of Gao et al. (2017), we construct the tail risk concerns index (RIX) as the

difference between the prices of two different option portfolios written on a global aggregate market

index At . Specifically, we define two option portfolios:

2erτ
Z
− 1
IV ≡ 2
P (At ; K, T )dK,
τ K<At K
2erτ 1 − ln (K/St )
Z
V− ≡ P (At ; K, T )dK, (1)
τ K<At K2

where r is the constant risk-free rate and P (·) is the price of a put option price on At with time-to-

maturity τ and strike K. Note that IV− has weights inversely proportional to the squared strike

K, whereas V− differs by assigning larger weights to more deeply OTM puts. Because deeper OTM

options protect investors against larger price changes, the difference between IV− and V− captures

investors’ expectation about large price drops. Our measure of tail risk concerns, associated with

the extreme downside price movement of the market index, is hence computed as:

2erτ
Z
− − − ln (At /K)
RIX ≡ V − IV = P (At ; K, T )dK. (2)
τ K<At K2

From equation (2), the RIX measure parsimoniously combines OTM options of different money-

ness, rather than using an ad-hoc choice of moneyness. In fact, it is effectively a disaster insurance

price under only no-arbitrage conditions. To see this, consider a market index process that fol-

lows the Merton (1976) jump-diffusion model with dAt /At = (r − λµJ ) dt + σdWt + dJt , where

σ is the volatility, Wt is a standard Brownian motion, Jt is a compound Poisson process with

jump intensity λ , and the compensator for the Poisson random measure ω [dx, dt] is equal to

4
 
1
λ √2πσ exp − (x − µJ )2 /2 . As shown in Gao et al. (2017),
J

Z T Z

1 + x + x2 /2 − ex ω − [dx, dt] ,

RIX ≡ 2EQ
t (3)
t R0

where ω − [dx, dt] is the Poisson random measure associated with negative price jumps. Therefore,

RIX− captures all the high-order (≥ 3) moments of the jump distribution with negative sizes given

that ex − (1 + x + x2 /2) = x3 /3 + x4 /4 + · · · .

One practical issue of computing a global tail risk concerns measure following equation (2),

however, is that there are no options written directly on a global aggregate market index that

should contain all assets in markets. To deal with this issue, we shall first construct the tail risk

concerns measures for individual assets, using available options written on their prices, and then

aggregate them to obtain a global tail risk concerns index, dubbed as GRIX. We defer the details

on the GRIX construction to Section 2.3, and first introduce the data of global asset returns and

options.

2.2 Asset Returns and Option Data

In this section, we introduce the large panel of return and option data of 30 international equity

indices, 32 foreign currencies, and 14 sovereign bond futures (Appendix A provides details on each

asset and data sources).

2.2.1 Asset returns

Our monthly returns of 30 MSCI/FTSE investable equity market indices are originally denominated

in local currencies.2 We convert them into US dollar-based returns as follows. Let rtk be the return

on equity index k denoted in a local currency for month t, and let St be the spot exchange rate

of currency k against the US dollar (i.e., foreign currency units per USD) at the end of month t.

Then the USD-based total return on the equity index k for month t + 1 is

k,U SD k
rt+1 = St (1 + rt+1 )/St+1 − 1. (4)
2
Using the international equity indices and index futures to directly compute returns delivers similar results.

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k,U SD f,U S
We then subtract rt+1 by Rt+1 , the one-month US T-bill rate, to obtain the excess return

rxk,U
t+1
SD
. To ensure our portfolio strategies are implementable, we use the spot exchange rates

from J.P. Morgan, one of the largest foreign currency dealers, to make such conversions.

Our series of monthly currency returns are computed using daily spot and one-month forward

exchange rates of 32 currencies against USD. We follow the literature (e.g., Lustig, Roussanov,

and Verdelhan, 2011) to work with spot and forward rates in logarithms, denoted as s and f ,

respectively. The change in (log) spot rate is defined as ∆st+1 = st+1 − st . A US investor who

buys a foreign currency k in the forward market and sells it in the spot market one month later

will earn a monthly (log) excess return

rxkt+1 ≡ ftk − skt+1 . (5)

To be consistent with the equity return calculation in equation (4)(as well as the bond return

calculation below), we use the simple return version of equation (5) in our baseline analysis (the

results using log returns remain little changed).

Our monthly returns of 14 sovereign bond futures are calculated using daily prices of the most

liquid futures contract, typically, the nearest- or the next-nearest-to-delivery contract. In particular,

at the end of each month, we select the nearest-to-maturity contract that will not expire during

the next month, often called the “front” contract.3 Let Ft,T
k be the price of this front contract, in

local currency, for bond k at the end of month t, with expiration date T . We calculate the monthly

return on a fully collateralized long position in this futures contract as


!
k
Ft+1,T
k
rt+1,T = k
+ Rtf,k − 1, (6)
Ft,T

where Rtf,k be the one-month risk-free rate in the same bond market during month t, which proxies

for interest rate earned on the cash collateral.4 The monthly excess return of this bond futures
3
As robustness checks, we also consider the “far” futures contract (the next maturity after the most liquid one)
and the 30-day constant maturity futures contract interpolated using the nearest and the next nearest to delivery
contracts. We find results to be little changed.
4
Bessembinder (1992), De Roon et al. (2000), Moskowitz et al. (2012), Asness et al. (2013), and Gorton et al.
(2013) compute returns on futures contracts similarly. However, it is worth noting that potential fluctuations of
interest rates may make the calculated futures returns deviate from the practical returns.

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contract is then

rxkt+1,T = rt+1,T
k
− Rtf,k = Ft+1,T
k k
/Ft,T − 1. (7)

We finally convert this excess return in local currency into a USD-based excess return rxk,U SD
t+1,T

using a similar procedure to that in equation (4).

Panels A, B, and C of Table 1 reports summary statistics of the USD-based monthly excess

returns of equity indices, foreign currencies, and bond futures, respectively, as calculated above.

The sample period is from January 1996 to December 2012 overall, varying across individual assets.

We observe that the monthly mean excess returns are mostly positive, with standard deviations

ranging from 4.8% to 12.5%, from 0.2% to 6.4%, and from 0.3% to 2.6% for equity, currency, and

bond, respectively.

2.2.2 Options

We obtain daily option prices for the 30 equity indices traded on various exchanges. These options

cover a large range of maturities from 7 to 300 calendar days, as well as a large range of strikes with

moneyness (=spot/strike) from 0.7 to 1.3. We compute the implied volatility from option prices

using the Black-Scholes formula, using the interbank borrowing rates of each respective equity

market as the discount rate.

We obtain daily implied volatility quotes of 32 currency options with one-month maturity,

traded over-the-counter, from J.P. Morgan. These currency options are written on the exchange rate

represented as how many units of foreign currencies per USD.5 Therefore, call options correspond

to the appreciation of USD and equivalently the depreciation of the foreign currency, which we

refer to as put options on foreign currencies below. For each currency each day, options of five

strikes are available, with five standardized Black-Scholes deltas: zero-delta option, 10-delta call,

10-delta put, 25-delta call, and 25-delta put.6 We convert the deltas into strikes using based on the

extended Black-Scholes formula in Garman and Kohlhagen (1983), using the one-month LIBOR of

USD and the respective interbank borrowing rates of foreign currencies as the discount rates.
5
The market of these currency options is the deepest, largest, and most liquid market for options of any kind.
According to the Bank for International Settlements, the notional value outstanding of over-the-counter currency
options at the end of June 2012 is 110 trillion US dollars.
6
The convention in foreign exchange markets is to multiply the put delta by –100 and call delta by 100. Hence,
a 10-delta put has a delta of –0.1, whereas a 10-delta call has a delta of 0.1.

7
We obtain daily prices of 14 sovereign bond futures options, which are usually issued on a

quarterly cycle, in March, June, September, and December. We use both the front contract of

the nearest expiration date and the back contract of the second nearest expiration date, with

time-to-maturities up to three and six months, respectively. Nine strikes are usually available,

for each of the two contracts at a time. Futures options are American options, but we expect a

negligible impact of early exercise on the RIX computation that mainly uses deep out-of-the-money

options, for which the early exercise is most unlikely.7 We hence compute the implied volatility of

bond futures options using the Black-Scholes formula, with the interbank borrowing rates of each

respective market as the discount rate.

Panels A, B, and C of Table 1 reports summary statistics of the implied volatility of each indi-

vidual asset, for both the at-the-money and out-of-the-money put options with a 30-day maturity.

The 30-day implied volatilities of equity index options and bond futures options are interpolated

through the implied volatility curve using all available options each day, while currency options

have an exact 30-day maturity. The moneyness of the out-the-money put option is set at 1.15 for

equity index and at 1.1 for bond futures, whereas the out-of-the-money put currency option has

the delta equal to -0.1. We report the time series average of the daily implied volatility series. We

observe that the average implied volatility of OTM options is higher than that of ATM options for

most assets, suggesting that average investors are concerned about extreme downside movements

of these assets.

2.3 Estimates of Asset-Class-Level and Global Tail Risk Concerns

As discussed in Section 2.1, we shall aggregate estimates of individual assets’ tail risk concerns to

construct a measure of global tail risk concerns. The aggregation procedure takes the conventional

perspective of an investor who considers portfolio investments in global asset markets through

holding international equity indices, foreign currencies, and global government bond futures. In

consequence, potential downside movements of these assets’ prices present risks to the investor,

consistent with the RIX construction in equation (2) using out-of-the-money puts on assets to

capture the tail risk concerns.


7
Jorion (1995) shows that the early exercise premium is negligible for short-maturity at-the-money options on
futures, whereas Overdahl (1988) finds that the early exercise of bond futures options happens only about 0.1% of
the time even for options that are significantly in the money.

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To compute the RIX estimates, we first conduct a few cleaning procedures of the options. We

then follow Carr and Wu (2009) and Gao et al. (2017) to generate 2,000 implied volatility points

equally spaced over a strike range of zero to three times the current spot price, for the front contract

of the bond futures and for a 30-day maturity for both equity indices and foreign currencies (See

Appendix B for details of the cleaning and interpolation procedures). Converting the generated

implied volatility curve into option prices, we compute the RIX measures, through a discretization

of the integral in equation (2), for each individual asset each day. We take the daily average over

the month to obtain a monthly RIX time series for each asset i, and then within each of the three

asset classes, we take the cross-sectional average across all available individual tail risk concerns

estimates to obtain the asset-class-level tail risk concerns measures, EQRIX, FXRIX, and BDRIX,

respectively, in each month t.

The top panel of Figure 1 presents time-series plots of the three asset-class-level tail risk concern

indices. We observe a salient commonality among them, suggesting that tail risk concerns carry

through the global financial markets. Their correlations, ranging from 43% to 65% as reported in

Panel B of Table 2, further confirm the strong commonality.

Panel B of Table 2 reports the principal component analysis using the correlation matrix of

EQRIX, FXRIX, and BDRIX. We observe that the first principal component loads similarly on the

three asset-class-level tail risk concerns, and explains 70% of the covariation. Accordingly, we use

the first principal component as our measure of global tail risk concerns, dubbed as GRIX. From

Panel A of Table 2, GRIX is highly correlated with all three asset-class-level tail risk concerns, as

well as a simple average of the three, with correlations all above 78%. The time series of GRIX

shown in the bottom panel of Figure 1 show that global tail risk concerns often spike in important

economic events, such as the 1997 Asian financial crisis, the recent 2007-2008 global recession, and

interestingly the stock market rally in October 2011.

3 Global Tail Risk Concerns and Asset Returns

In this section, we conduct our empirical tests of the explanatory power of GRIX-β for global asset

returns. We first describe the estimation procedure of the GRIX-β in the following subsection.

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3.1 Beta Estimation and Portfolio Formation

We estimate assets’ exposure to global tail risk concerns, i.e., the GRIX-β, through a conventional

rolling-window regression of asset returns on the innovation measure of global tail risk concerns.

We construct this innovation measure following the same aggregation procedure of constructing the

GRIX index as in Section 2.3. Specifically, we first measure the innovation in the three asset-class-

level tail risk concerns indices as the difference between the respective index level of the current

month and its past 12-month moving average. We then use the first principal component of the

three asset-class-level innovation measures as the measure of innovation in global tail risk concerns,

denoted as ∆GRIXt .

For each asset, we estimate its exposure to GRIX, dubbed as β GRIX , by regressing its monthly

excess returns rxt on ∆GRIXt , controlling for the market factor M KTt . That is, we run the

regression, rxt = α + β GRIX · ∆GRIXt + β m · M KTt + εt , where M KTt is proxied by the MSCI

world equity index excess return, for each asset in each month. The regression uses past-18-month

observations to ensure a reasonable number of observations in the estimation.

Throughout the paper, we construct portfolios based on an asset’s β with respect to global tail

risk concerns. We consider portfolio formation not only at the monthly frequency, but also at the

longer quarterly, semi-annual, and annual horizons. In computing the abnormal returns or alphas,

we use the benchmark factors including the global market factor (MSCI world equity index excess

return), the Frazzini and Pedersen (2014) betting-against-beta (BAB) factors, the Moskowitz et al.

(2012) time series momentum (TSMOM) factors, and the Asness et al. (2013) value (VE) and

momentum (ME) factors of multiple asset classes, which have been shown to explain global asset

returns across markets.

3.2 Baseline Results

We now investigate how global tail risk concerns affect the cross-sectional return variations of global

assets. In particular, we rank 76 global investment assets into five GRIX-β quintiles and look at

their future performance. Each quintile on average contains 12 assets, which can come from equity,

bond or currency. All these assets are already “market-level” assets, and most of them are each

a diversified portfolio by design. For example, each equity index we use represents a diversified

10
portfolio of individual stocks within an economy, which already diversifies away a large amount of

idiosyncratic exposures. As a result, we expect the asset pricing tests to be powerful even with a

relatively small number of assets in each quintile.

Panel A of Table 3 shows that assets’ β with respect to the global tail risk concerns is a significant

driver for their future returns. At the monthly frequency, asset returns decrease with the GRIX-β,

and the return spread of low-minus-high GRIX-β portfolio is 0.95% per month and more than

three standard errors away from zero. This spread decreases when portfolios are formed at lower

frequencies, but still quite significant, about 0.69%, 0.60%, and 0.61% with Newey-West t-statistics

of 2.89, 2.54, and 2.57 at the quarterly, semi-annual, and annual frequencies, respectively.

Panel B of Table 3 presents the factor loadings of monthly formed GRIX-β quintiles. The hedged

portfolios have no significant loadings on the MSCI market factor, the BAB factor, the TSMOM

factor, and the value factor.8 Interestingly, low and high GRIX-β assets carry significantly different

loadings on the momentum factor. However, the return patterns associated with the GRIX-β

are not attributed to effects of any of these factors. As shown in Panel A, at the monthly and

quarterly formation frequencies, the alphas of hedge portfolios are 0.77% and 0.50% per month,

both economically large and statistically significant.

Does the low (or high) GRIX-β portfolio only contain assets from a single asset class? Moreover,

does the asset composition across equity indices, foreign currencies, and bond futures vary over time

in the low (or high) GRIX-β portfolio? Figure 2 presents asset class distributions over time of both

low (top panel) and high (bottom panel) GRIX-β portfolios. Take the allocation distribution of the

equity indices as an example. We count the number of equity indices within the low (or high) GRIX-

β quintile, and divide it by the total number of equity indices that are available for investment

at the end of each month when we form GRIX-β portfolios. Figure 2 shows that no single asset

class fills up the low or high GRIX-β portfolio at any time. That is, both low and high GRIX-β

portfolios contain assets from multiple asset classes in our sample. Moreover, the composition of

low and high GRIX-β portfolios varies over time, indicating that asset classes have time-varying

loadings on tail risk concerns. Overall, our empirical evidence implies that return dynamics driven

by the GRIX indeed carry through across all the three asset classes, in response to time-varying
8
Tsai and Wachter (2016) show that a value premium can be explained by rare booms that were expected but
did not occur. In contrast, our GRIX effect is about downside tail risk exclusively.

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global tail risk concerns.

3.3 The Global Nature of Tail Risk Concerns

In this section, we conduct two empirical tests to show that the significant pricing power documented

above comes mostly from the common global variation of tail risk concerns across asset classes. That

is, the pricing of tail risk concerns has the salient feature of being a global channel.

3.3.1 Testing across asset classes

In the first test, we study the incremental pricing power, of adding asset-class-level tail risk concerns

indices progressively in the construction of GRIX, on the cross section of all 76 global assets. We

expect the pricing power to be stronger when more asset-class-level tail risk concerns indices are

used to measure the global tail risk concerns, which helps purge noises and asset-specific factors.

We first form quintile portfolios using all 76 global assets based on the beta estimates with

respect to EQRIX, BDRIX, and FXRIX, separately. Panel A of Table 4 reports both raw returns

and five-factor alphas of these quintile portfolios at the monthly horizon. We observe that the

return spread of the portfolio sorted by EQRIX-betas is 0.73% (t = 2.75), whereas the return

spreads of the portfolios sorted by FXRIX and BDRIX are 0.41% and 0.09%, respectively, neither

statistically significant. These are all lower and less significant than the return spread of 0.95%

(t = 3.45) in the baseline analysis using the GRIX.

Furthermore, we construct three measures of tail risk concerns common to two asset classes,

including the “EQBD” tail risk concerns using the first principal component of EQRIX and BDRIX,

the “EQFX” tail risk concerns using the first principal component of EQRIX and FXRIX, and the

“BDFX” tail risk concerns using the first principal component of BDRIX and FXRIX. Panel B of

Table 4 presents quintile portfolio results, of all 76 global assets, based on the beta estimates with

respect to “EQBD”, “EQFX”, and “BDFX” tail risk concerns, separately. We observe that the

pricing effects of these betas are stronger than those of individual asset-class-level tail risk concerns.

Specifically, the largest pricing effect, among all three combinations, is based on the “EQBD” tail

risk concerns, with a monthly return spread of 0.81% (t = 3.73). This is larger and more significant

than the return spread of 0.73% (t = 2.75) based only on EQRIX, which is the largest among those

using individual asset-class-level tail risk concerns. More intriguingly, although neither BDRIX nor

12
FXRIX has significant pricing power, as shown in Panel A, the return spread based on the “BDFX”

tail risk concerns is 0.55% per month and marginally significant (t = 1.70). Yet, the pricing power

of any common component of two asset-class-level tail risk concerns is still weaker than that of the

GRIX.

Overall, consistent with our hypothesis that the pricing power of tail risk concerns is mainly a

global economic channel, using more asset-class-level tail risk concerns indices in measuring global

tail risk concerns brings larger pricing effects on global assets.

3.3.2 Testing within each asset class

In the second test, we study the pricing effect of the global tail risk concerns vs asset-class-level

tail risk concerns within each asset class. The results for equity index, foreign currency, and bond

futures are shown in Panels A, B, and C, respectively. We form quartile portfolios to ensure a

sufficient number of assets in each portfolio, and report both raw returns and alphas adjusting for

the five factors at the monthly horizon.

In particular, the first two columns of Table 5 report the portfolios sorted by the asset-class-level

tail risk concerns betas and by the global tail risk concerns betas for each asset class, respectively.

We observe that the return spread based on the GRIX-β is 0.97% (t = 2.89), much larger and more

significant than that based on the EQRIX-β (0.63% with a t-statistics of 2.16). The alpha based

on the GRIX-β is also larger (0.83% with a t-statistics of 2.58) than that based on the EQRIX-β

(0.55% with a t-statistics of 1.63). This pattern is true for currency, whereas the return spread

based on the GRIX-β and the BDRIX-β are similar and insignificant for bonds, probably due to

the limited number of assets available.

We further decompose each of the three asset-class-level tail risk concerns measures into a

component driven by the GRIX and an orthogonal component by regressing EQRIX, FXRIX, and

BDRIX onto GRIX and extract the residuals, separately. The three series of orthogonal components

capture the tail risk concerns that are specific to one asset class.9 The last column of Table 5 reports

the quartile portfolios sorted by the asset-class-specific tail risk concerns betas. We find that the

return spreads are 0.39% (t=1.19), -0.12% (t=0.69), and 0.11% (t=1.03), for equity, currency, and
9
Pukthuanthong and Roll (2009) use a multi-factor model to study the integration of global equity mar-
kets, whereas Duffie and Garleanu (2001) and Seo and Wachter (2015) propose models of rare disaster risk with
global/regional factors and with two jump intensity factors, respectively.

13
bond, respectively, all insignificant.

In sum, within each asset class, the cross-sectional pricing power of the GRIX subsumes that

of asset-class-level tail risk concerns factors, and the asset-class-specific components have no pric-

ing power, further confirming our hypothesis that the pricing power of tail risk concerns works

substantially as a global channel.

4 Economic Channels of Global Tail Risk Concerns

As our measure of tail risk concerns is based on option prices, it may capture different economic

channels of tail risk. For example, the tail risk concerns may arise from the investors’ rational belief

on the tail risk of the economy (Barro (2006), Gabaix (2012), and Wachter (2013)), or from the

investors’ subjective belief on the tail risk that deviates from the rational belief (Barberis (2013),

Gennaioli et al. (2012), Baron and Xiong (2017), and Weitzman (2007)), among others.10

It is usually hard, if not impossible, to identify which specific economic channel of tail risk drives

asset prices. Yet, in this section, we present some evidence on the economic mechanism associated

with the global tail risk concerns. In particular, we show that the pricing power of GRIX-β is

distinctive from that of the tail risk factor based on historical observations of tail events, suggesting

that global tail risk concerns likely reflect investors’ ex-ante subjective belief about tail risk. We

present analysis on both the cross-sectional dimension and the time-series dimension.

4.1 Cross-Sectional Evidence

In this section, we show that the pricing power of GRIX-β for cross-sectional asset returns is

distinctive from that of the tail risk factor based on historical observations of tail events. The

historical-observation-based tail risk factor we use is that proposed in Kelly and Jiang (2014) by

an innovative approach based on a large cross section of individual stock returns.11

For a fair comparison between the KJ factor and our factor of global tail risk concerns, we use

the cross section of U.S. individual stocks (rather than the global assets) as testing assets because
10
Another channel studied in the literature is the uncertainty on tail risk (Bates (2008), Liu et al. (2005), Drechsler
(2013), and Orlik and Veldkamp (2014)).
11
Berkman et al. (2011) capture the time-varying disaster probability using the number and severity of international
political crises, Manela and Moreira (2017) propose a measure of disaster concerns using textual analysis of newspaper
articles, and Bao et al. (2016) construct a novel measure of systemic default using accounting variables and historical
equity returns, all in a long sample.

14
the KJ factor only captures the U.S. equity market tail risk by construction. Panel A of Table 6

reports the quintile portfolios of stocks sorted by the KJ-βs, which are estimated following exactly

the predictive-regression-based procedure of Kelly and Jiang (2014).12 We restrict the portfolio

formation period to be the same as our sample period, from July 1997 to December 2012, different

from the original sample period in Kelly and Jiang (2014) from 1963 to 2012. Panel A shows

that the equally-weighted monthly excess return and alpha (against the Fama and French (1993)

and Carhart (1997) four factors) of the high-minus-low KJ-β quintile portfolio are about 0.4% per

month and marginally significant, weaker than, but consistent with their original findings. The

results are not significant for value-weighted portfolios, though, probably due to the short sample

period.

Panel B of Table 6 reports the quintile portfolios of stocks sorted by the GRIX-βs, which are

estimated following the procedure in Section 3.1, with the KJ factor added to control for the

confounding effect. The monthly excess return and alpha (against the Fama and French (1993)

and Carhart (1997) four factors) of the low-minus-high GRIX-β quintile portfolio is similar to

those of the KJ-β quintile portfolio, marginally significant for equal-weighted portfolios but not

significant for value-weighted portfolios. Specifically, the alpha of the low-minus-high GRIX-β

quintile portfolio is 0.35% per month (t = 1.83) and 0.37% per month (t = 1.28) for equally-

weighted and value-weighted portfolios, respectively.

To differentiate the pricing power of the GRIX-β from the KJ-β, Panel C of Table 6 reports

the Fama and MacBeth (1973) regression with both betas. We include both GRIX-β and KJ-β

in the regression, and standardize both betas to have a zero mean and unit standard deviation.

The coefficients on GRIX-β are marginally significant, whereas KJ-βs are either marginally or not

significant. That is, the pricing power of GRIX-β is distinctive from that of KJ-β.13

This distinctive pricing power can arise from two differences: (1) The GRIX captures the ex

ante subjective belief of tail risk, whereas the KJ factor captures the tail risk reflected in the ex

post realizations of tail events; (2) The GRIX captures the global tail risk, whereas the KJ factor
12
See Kelly and Jiang (2014) for a detailed discussion of this unconventional beta estimation procedure and related
sign of the pricing effect of the tail risk beta.
13
We include a large set of firm characteristics as controls, including size (log market equity) and (log) book-to-
market equity (Fama and French (1992)), past-12-month returns (Jegadeesh and Titman (1993)), operating profitabil-
ity(OP) and investment (Fama and French (2015)), operating accruals (Sloan (1996)), Amihud’s illiquidity (Amihud
(2002)), idiosyncratic return volatility (Ang et al. (2006)), systematic skewness (Harvey and Siddique (2000)), and
idiosyncratic skewness (Bali et al. (2011)).

15
captures the U.S. specific tail risk. To further differentiate between these two interpretations, we

construct a U.S. equity market tail risk concerns measure, following the same procedure of the

GRIX construction, but using only S&P 500 index options, dubbed as SPRIX. Panel C of Table 6

reports the quintile portfolios of stocks sorted by the SPRIX-βs. The monthly excess return and

alpha of the low-minus-high SPRIX-β quintile portfolio are similar to those of the GRIX-β and

KJ-β quintile portfolio, marginally significant for equal-weighted portfolios but not significant for

value-weighted portfolios.

In addition, columns (3)-(4) in Panel D of Table 6 shows that the coefficients on SPRIX-β are

significant in the presence of KJ-βs. Given that SPRIX only uses U.S. equity index options, its

distinctive pricing power suggests that tail risk concerns likely reflect the ex ante subjective belief

of tail risk, rather than the tail risk captured by the KJ factor based on ex post realizations of tail

events

4.2 Time-Series Evidence

In this section, we differentiate the GRIX effect on asset prices from that of the KJ factor along

the time series dimension. Panel A of Table 7 reports that the time series correlation between the

GRIX and KJ factors is negative, about 30% in magnitude. Panel B then reports the predictive

regressions of the 12-month U.S. market return (left panel) and of the 12-month global market

return (right panel) on these two factors, both separately and jointly. We observe that both U.S.

and global market returns are significantly predicted by the GRIX positively, whereas the KJ factor

has no predictive power. In the joint predictive regressions, the KJ factor has marginal and positive

predictive power, but the GRIX still significantly predicts the future market returns. Overall, both

the time series correlation and return predictability are consistent with the interpretation that

global tail risk concerns reflect the ex ante subjective belief of tail risk, rather than the objective

tail risk associated with historical tail events captured by the KJ factor.

To further confirm the distinctive pricing power of global ex-ante tail risk concerns, we consider

a recently proposed measure of tail risk by Bollerslev et al. (2015), denoted as LJV. The LJV

measure is also constructed using options, and hence reflects the ex-ante tail risk concerns, similar

to our GRIX measure. In consequence, we expect the time series variation of the LJV measure to

be similar to that of the GRIX index and different from that of the KJ factor.

16
Panel A of 7 reports that the LJV series have a -35% correlation with the KJ series, but a 77%

correlation with the GRIX series. The predictive regressions of the 12-month U.S. market return

(left panel) and of the 12-month global market return (right panel), reported in Panel C, show

that the LJV has positive and significant predictive power, similar to GRIX. In addition, a simple

horse race of GRIX and LJV, reported in the last columns of Panel C, leads to reduced statistical

significance for both, likely due to their correlation. In sum, both GRIX and LJV, as option-

based measures of tail risk, indeed have distinctive pricing effects from that based on historical

observations of tail events.

5 Additional Analyses and Robustness Checks

We conduct a number of additional analyses and robustness checks in this section.

5.1 Funding Liquidity Risk

We first examine the robustness of the GRIX effect to liquidity risk because tail risk shocks are

oftentimes accompanied by the shortage in funding liquidity or arbitrage capital. We collect a large

set of liquidity factors, including the Hu et al. (2013) “noise” measure associated with the shortage

of arbitrage capital and the Adrian et al. (2014) broker-dealer leverage measure, as well as the

series of Treasury-Eurodollar (TED) spread (the local 3-month interbank borrowing rate minus the

local 3-month T-bill rate), the LIBOR-Repo spread (the local 3-month interbank borrowing rate

minus the local 3-month General Collateral repurchase rate), and the Swap-Treasury spread (the

local 10-year interest swap rate minus the local 10-year government bond yield) in each of the four

markets, where the 3-month interbank borrowing rates are proxied by LIBOR for the U.S., U.K.,

and Japan, and by EURIBOR for the Euro zone.

We obtain the daily series of these measures from the the Thomson Reuters Tick History, J.P.

Morgan, and Federal Reserve Economic Data of the St. Louis Fed. We compute the average of

the daily series within a month, obtain the innovations of the monthly series, and extract the first

principal component of their correlation matrix as a measure of aggregate funding liquidity shock.

Table 8 presents the loadings of the low-minus-high GRIX-β return spread on these liquidity risk

measures. We find that none of the loadings are significant and the adjusted R2 s are tiny, suggesting

17
that the GRIX-β effect is not driven by funding liquidity risk.

5.2 Developed vs Emerging Markets

Does the pricing power of global tail risk concerns differ in developed and in emerging markets?

Intuitively, emerging markets are more liable to global tail risk concerns, as they are usually more

fragile than developed markets both economically and politically. As a result, the assets’ exposure

to global tail risk concerns should be more widespread in emerging markets than in developed

markets. We test this hypothesis by ranking assets into five GRIX-β quintiles, within the set of

assets from developed markets and within the set of assets from emerging markets separately.14

The total number of assets from developed markets is 48, including 22 equity indices, 12 currencies,

and all 14 bond futures, whereas the total number of assets from emerging markets is 28, including

8 equity indices and 20 currencies.15

Table 9 reports the average beta and portfolio return for each quintile, of the developed market

in Panel A and of the emerging market in Panel B. We observe that beta difference between the high

and low GRIX-β portfolios is 0.091 for emerging markets, but is only 0.052 for developed markets.

That is, assets’ exposure to global tail risk concerns is indeed more widespread in emerging markets

than in developed markets.

The return spread between high and low GRIX-β portfolios is mostly significant for both mar-

kets. Importantly, the economic magnitude of the return spread is larger in emerging markets

than in developed markets. Specifically, for developed markets, the return spread is 0.88% with

a t-statistic of 3.70 at the monthly horizon, and becomes smaller at longer horizons, though still

significant at the annual horizon. For emerging markets the return spread is 1.46% and marginally

significant at the monthly horizon, but becomes larger and statistically more significant at longer

horizons, e.g., 1.61% with a t-statistic of 2.37 at the annual horizon. Therefore, consistent with our

hypothesis, the GRIX-β effect is stronger in emerging markets than in developed markets.
14
We thank an anonymous referee for suggesting this test.
15
Excluding bond futures from the set of assets in developed markets does not change the results qualitatively.

18
5.3 Alternative Construction of the GRIX Measure

In this section, we check the robustness of the pricing effect of global tail risk concerns to the

construction of the GRIX measure. First, in our baseline analysis, the construction of asset-class-

level RIXs (and hence the GRIX) equally weights the tail risk concerns measures of individual assets.

Panel A of Table 10 reports the portfolio results using a value-weighted GRIX measure. Specifically,

we weight an individual asset’s tail risk concerns measure by the corresponding country’s GDP value

in the previous year, obtained from the World Bank Database. For sovereign bonds, there can be

multiple assets for one country, e.g., the 2-year, 5-year, 10-year, and 30-year bond futures of U.S.

In measuring the BDRIX, we hence weight all assets within a country equally, and then weight each

country by its GDP. We finally extract the first principal component of the three value-weighted

asset-class-level RIXs as the value-weighted GRIX measure.16 We follow the same procedure as in

Section 3.1 to estimate an asset’s beta with respect to the value-weighted GRIX and form quintile

portfolios. Panel A of Table 10 shows that the portfolio results using this value-weighted GRIX are

qualitatively the same as the baseline results in Table 3.

Second, our baseline GRIX measure is constructed using the first principal component of the

three asset-class-level indices of tail risk concerns. Panel B of Table 10 reports the portfolio results

using the GRIX measure constructed as the simple average of the three asset-class-level indices.

As shown in Table 2, the simple average is highly correlated with the first principal component.

Importantly, Panel B of Table 10 shows that the portfolio results using this simple average-based

GRIX measure are roughly the same as the baseline results.

Third, in aggregating estimates of individual assets’ tail risk concerns to construct a measure

of global tail risk concerns, the baseline analysis uses out-of-the-money put options to capture the

downside risk. Panel C of Table 10 reports the portfolio results using a GRIX measure based on

both out-of-the-money call and put options. Specifically, we measure the net tail risk concerns of

each individual asset by the difference between the tail risk concerns on downside price movements

and the tail risk concerns on upside price movements that follow a formula similar to equation (2)
16
We exclude Taiwan from our sample, as its GDP data are not available in the World Bank Database. Moreover,
we aggregate the GDP of Denmark, Finland, Iceland, Norway, and Sweden to measure the GDP of Nordic countries,
which is weight for the Nordic equity market index. For the equity index and currency of the Euro zone, ESTX50
and Euro, respectively, we use the aggregate GDP of the Euro Zone for weighting. Excluding the regional assets that
span multiple countries hardly changes the results.

19
but with calls. The corresponding GRIX measure, based on these net tail risk concerns measures

of individual assets, captures the global tail risk concerns on net. The portfolio results show that

the effect of global tail risk concerns on cross-sectional asset returns is both economically and

statistically robust. The low-minus-high return spread for monthly portfolio formation is 0.77%

with a t-statistics of 3.3.

6 Conclusion

We show that the exposure to global ex-ante tail risk concerns drives common variations of asset re-

turns across asset classes, including international equity indices, foreign currencies, and government

bond futures. In particular, assets that have low β with respect to a global tail risk concerns index

based on out-of-the-money options earn significantly higher returns in the cross section of securities

across asset classes. The pricing power of GRIX becomes stronger when more asset-class-level tail

risk concerns are incorporated in the index construction, and dominates within each asset class,

implying that the pricing effect of tail risk concerns works predominantly as a global channel. We

also show that the GRIX pricing effect is distinct from that of tail risk factors based on historical

realizations, consistent with the interpretation that tail risk concerns likely reflect investors’ ex-ante

subjective belief about tail risk.

It will be important to further investigate the economic channels behind the pricing of tail risk or

disaster risk. A potential future direction is to study the pricing power of investors’ time-varying

belief vs time-varying risk aversion associated with disaster risk. To conduct such an analysis,

it may be useful to look into some survey data that capture market participants’ belief on tail

probabilities of the economy. Moreover, a structural framework may be needed to incorporate both

channels and their interactions in order to draw quantitative conclusions.

20
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24
Figure 1. Time Series of Tail Risk Concerns Indices

EQRIX BDRIX FXRIX

0.045 0.25

0.04
0.2
0.035

0.03 0.15

0.025
0.1
0.02

0.015 0.05

0.01
0
0.005

0 ‐0.05
Jan‐96
Jun‐96
Nov‐96
Apr‐97
Sep‐97
Feb‐98
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Dec‐98
May‐99
Oct‐99
Mar‐00
Aug‐00
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10

Lehman and the 
peak of 2007‐08 
8
financial crisis

6 Japan's recession in 
23 years US debt downgrade 
Global stock market  and Euro debt crisis
downturns in 2002
The Asian 
4 Financial 
Crisis Bear Stearns 
Bond market selloff Market 
Collapse Flash  rally
Russia's default, LTCM 
collaps, Latin‐US‐Japan  Crash
stock market crashes Indian stock market 
2 HK and US  meltdown and emerging 
HK and 
market markets sell‐off
US 
plummets 9/11 attacks
market Quant crisis

‐2
Jan‐96
May‐96
Sep‐96
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Jan‐06
May‐06
Sep‐06
Jan‐07
May‐07
Sep‐07
Jan‐08
May‐08
Sep‐08
Jan‐09
May‐09
Sep‐09
Jan‐10
May‐10
Sep‐10
Jan‐11
May‐11
Sep‐11
Jan‐12
May‐12

Notes. The upper panel presents monthly time series of the three asset-class-level RIXs,
EQRIX for equity index, FXRIX for foreign currency, and BDRIX for bond futures, with the
scale of the first two on the left axis and the scale of the last on the right axis. The lower
panel presents monthly time series of the global tail risk concerns index (GRIX), calculated
as the first principal component of the correlation matrix of the three asset-class-level RIXs.
We also mark major economic events corresponding to the spikes of GRIX.

25
Figure 2. Asset Distribution of GRIX-β Portfolios

Quintile 1 (Low Beta)


10 20 30 40 50
0

Jan98 Jul01 Jan05 Jul08 Jan12

Equity Currency Bond

Quintile 4 (High Beta)


0 10 20 30 40 50

Jan98 Jul01 Jan05 Jul08 Jan12

Currency Equity Bond

Notes. This figure plots monthly time series of the asset distribution of the low and high GRIX-β quintiles
in the top and bottom panel, respectively. The percentage value for each asset class is calculated by first
counting the number of individual securities within the low (or high) GRIX-β quintile that belong to this
specific asset class, and then dividing it by the total number of individual securities available in this asset
class at the end of each portfolio formation month.

26
Table 1. Summary Statistics of Global Asset Returns and Options

Return Option
Start End Mean Std Dev Start End IV (OTM) IV (ATM)
Panel A: International Equity Index
Australia 199601 201210 0.77% 0.061 200102 201210 0.275 0.171
Austria 199601 201210 0.53% 0.071 199601 201210 0.264 0.206
Belgium 199601 201210 0.47% 0.064 199601 201210 0.266 0.203
Canada 199601 201210 0.80% 0.062 199909 201210 0.286 0.193
Denmark 199601 201210 0.84% 0.060 200510 201201 0.247 0.221
Europe 199801 201210 0.35% 0.066 200107 201210 0.366 0.240
Finland 199601 201210 0.89% 0.091 200502 201210 0.285 0.248
France 199601 201210 0.56% 0.062 200505 201210 0.342 0.226
Germany 199601 201210 0.54% 0.070 200107 201210 0.358 0.240
Greece 199601 201210 0.09% 0.105 200010 201210 0.400 0.343
Hong Kong 199601 201210 0.64% 0.075 199601 201210 0.366 0.268
India 200005 201210 1.12% 0.093 200107 201210 0.337 0.248
Israel 199601 201210 0.54% 0.070 199601 201210 0.296 0.217
Italy 199801 201210 0.22% 0.072 200405 201210 0.333 0.223
Japan 199601 201210 -0.19% 0.055 199601 201210 0.331 0.244
Mexico 199606 201210 0.94% 0.077 200406 201210 0.282 0.229
Netherlands 199601 201210 0.50% 0.062 199701 201210 0.352 0.233
Nordic Countries 199601 201210 0.87% 0.075 200609 201210 0.289 0.252
Norway 199601 201210 0.82% 0.079 199902 201210 0.304 0.241
Poland 199601 201210 0.87% 0.104 200309 201210 0.337 0.273
Russia 199606 201210 1.61% 0.152 200903 201210 0.480 0.369
Singapore 199601 201210 0.50% 0.078 200904 201210 0.250 0.192
South Korea 199601 201210 0.70% 0.120 199707 201210 0.391 0.326
Spain 199601 201210 0.70% 0.072 200111 201210 0.340 0.240
Sweden 199601 201210 0.89% 0.077 200411 201210 0.336 0.229
Switzerland 199601 201210 0.54% 0.051 200107 201210 0.313 0.188
Taiwan 199603 201210 0.25% 0.086 200106 201210 0.321 0.241
Thailand 199601 201210 0.76% 0.108 200806 201210 0.323 0.248
United Kingdom 199601 201210 0.46% 0.048 199601 201210 0.329 0.206
United States 199601 201210 0.47% 0.048 199601 201210 0.330 0.199

27
Table 1. (Continued)
Return Option
Start End Mean Std Dev Start End IV (OTM) IV (ATM)
Panel B: Foreign Currency
Developed Markets
Australian Dollar 199602 201205 0.39% 0.037 199601 201205 0.140 0.120
Canadian Dollar 199603 201205 0.18% 0.025 199602 201205 0.090 0.080
Danish Krone 199608 201205 0.01% 0.030 199607 201205 0.120 0.110
Euro 199902 201205 0.08% 0.031 199901 201205 0.120 0.110
Japanese Yen 199603 201205 -0.07% 0.032 199602 201205 0.110 0.110
New Zealand Dollar 199701 201205 0.35% 0.039 199612 201205 0.150 0.130
Norwegian Krone 199603 201205 0.14% 0.032 199602 201205 0.130 0.120
Swedish Krona 199602 201205 0.02% 0.033 199601 201205 0.130 0.120
Swiss Franc 199602 201205 0.00% 0.032 199601 201205 0.110 0.110
UK Pound 199602 201205 0.13% 0.025 199601 201205 0.100 0.090
Emerging Markets
Argentine Peso 200404 201205 0.57% 0.026 200403 201205 0.130 0.070
Brazilian Real 200404 201205 1.25% 0.044 200403 201205 0.210 0.150
Chilean Peso 200404 201205 0.36% 0.038 200403 201205 0.170 0.120
Colombian Peso 200404 201205 0.70% 0.040 200403 201205 0.180 0.140
Czech Koruna 200012 201205 0.51% 0.039 200011 201205 0.140 0.130
Hong Kong Dollar 199602 201205 -0.01% 0.002 199601 201205 0.020 0.010
Hungarian Forint 200012 201205 0.70% 0.046 200011 201205 0.190 0.150
Icelandic Krona 200602 201205 -0.25% 0.053 200601 201205 0.360 0.380
Indian Rupee 200404 201205 0.23% 0.025 200403 201205 0.110 0.080
Indonesian Rupiah 200104 201205 3.26% 0.064 200103 201205 0.160 0.120
Israeli Shekel 200404 201205 0.19% 0.027 200403 201205 0.100 0.080
Malaysian Ringgit 200012 201205 1.98% 0.026 200011 201205 0.150 0.140
Mexican Peso 200012 201205 0.16% 0.029 200011 201205 0.150 0.110
Peruvian Nuevo Sol 200404 201205 0.57% 0.024 200403 201205 0.080 0.050
Philippine Peso 200303 201205 0.56% 0.017 200302 201205 0.110 0.080
Polish Zloty 200012 201205 0.59% 0.044 200011 201205 0.180 0.150
Russian Rouble 200602 201205 0.34% 0.035 200601 201205 0.140 0.100
Singaporean Dollar 199704 201205 -0.01% 0.019 199703 201205 0.070 0.060
South African Rand 199602 201205 1.20% 0.059 199601 201205 0.210 0.160
South Korean Won 200203 201205 0.23% 0.037 200202 201205 0.140 0.110
Taiwanese Dollar 200409 201205 0.05% 0.018 200408 201205 0.070 0.060
Thai Baht 200012 201205 1.10% 0.030 200011 201205 0.080 0.070
Panel C: Global Sovereign Bond Futures
Australia 10YR 199601 201212 0.02% 0.003 199601 201212 0.025 0.037
Australia 3YR 199601 201212 0.04% 0.003 199601 201212 0.023 0.020
Canada 10YR 199602 200305 0.20% 0.015 199601 200305 0.068 0.067
Germany Bund 199601 201212 0.33% 0.014 199601 201212 0.059 0.056
Germany Schatz 199802 201212 0.09% 0.004 199802 201212 0.015 0.014
Germany Bobl 199601 201212 0.22% 0.008 199601 201212 0.036 0.035
Italy 10YR 199801 200006 0.07% 0.013 199601 200006 0.078 0.073
Japan 10YR 199601 201212 0.21% 0.010 199601 201212 0.049 0.041
Spain 10YR 199601 200006 0.35% 0.014 199601 200008 0.077 0.074
UK Gilt 199601 201212 0.23% 0.016 199601 201212 0.081 0.080
US 2YR 200611 201212 0.16% 0.004 200611 201212 0.020 0.015
US 5YR 199601 201212 0.21% 0.011 199601 201212 0.050 0.044
US 10YR 199601 201212 0.32% 0.016 199601 201212 0.077 0.067
US 30YR 199601 201212 0.28% 0.026 199601 201212 0.110 0.103
Notes. This table reports summary statistics of US dollar-based monthly excess returns (in excess of the one-month
US T-bill rate) and implied volatilities (IV) for equity indices (Panel A), currencies (Panel B), and bond futures
(Panel C). The first four columns report the sample period, mean, and standard deviation of the excess returns of
each asset, while the last four columns report the sample period, mean IV of the out-of-the-money put option, and
mean IV of the at-the-money option. For equity, the moneyness of OTM options is 15% away from that of ATM
options; for bond, the moneyness is 10% away; and for currency, OTM and ATM options have Black-Scholes deltas
of 10% and 0%, respectively.
28
Table 2. Correlations and Principal Components
Panel A: Correlations
EQRIX FXRIX BDRIX GRIX (PC1) Simple Avg
EQRIX 1 0.55 0.43 0.78 0.64
FXRIX 1 0.65 0.89 0.99
BDRIX 1 0.83 0.67
GRIX (PC1) 1 0.93
Simple Avg 1
Panel B: Principal Component Analysis
Loading % variation
EQRIX FXRIX BDRIX
PC1 0.54 0.62 0.58 70%
PC2 0.79 -0.14 -0.59 19%
PC3 0.28 -0.77 0.57 11%
Notes. Panel A reports the sample correlations between asset-class-level
RIXs, the GRIX, and the simple average of the three asset-class-level RIXs.
All of these sample correlations are significant at the 1% level. Panel B
reports loadings of the three principal components, as well as the respective
percentage of variation explained by them.

29
Table 3. GRIX-β Portfolios

Panel A: portfolio excess returns and alphas


Monthly Quarterly Semi-annually Annually
ExRet Alpha ExRet Alpha ExRet Alpha ExRet Alpha
Low GRIX-β 0.922 0.487 0.798 0.393 0.822 0.464 0.753 0.497
(2.03) (1.79) (1.87) (1.56) (2.00) (1.92) (1.83) (1.91)
2 0.586 0.257 0.546 0.220 0.461 0.138 0.518 0.174
(2.79) (1.90) (2.30) (1.63) (1.78) (0.90) (2.07) (1.43)
3 0.257 -0.104 0.353 -0.001 0.38 0.012 0.473 0.052
(1.12) (-0.88) (1.61) (-0.01) (1.73) (0.12) (1.99) (0.39)
4 0.294 -0.049 0.218 -0.211 0.168 -0.272 0.142 -0.334
(1.07) (-0.26) (0.73) (-1.02) (0.57) (-1.35) (0.47) (-1.76)
High GRIX-β -0.026 -0.277 0.107 -0.106 0.219 -0.005 0.143 -0.050
(-0.06) (-1.18) (0.25) (-0.47) (0.51) (-0.02) (0.34) (-0.22)
Low-High 0.948 0.765 0.691 0.500 0.603 0.469 0.609 0.546
(3.45) (2.71) (2.89) (2.13) (2.54) (2.05) (2.57) (2.21)
Panel B: factor loadings of monthly formed portfolios
MSCI Market BAB TSMOM VE ME
Low GRIX-β 0.922 0.507 0.052 -0.223 0.156
(19.48) (2.51) (0.79) (-1.15) (1.19)
2 0.425 0.271 0.164 -0.063 -0.094
(11.87) (2.11) (3.07) (-0.45) (-0.76)
3 0.519 0.566 0.049 -0.065 -0.128
(13.18) (4.21) (1.28) (-0.61) (-2.04)
4 0.583 0.48 0.084 -0.123 -0.205
(13.00) (4.01) (1.64) (-1.25) (-2.44)
High GRIX-β 0.96 0.539 0.046 -0.253 -0.426
(20.81) (3.17) (0.72) (-1.93) (-3.42)
Low-High -0.038 -0.032 0.006 0.03 0.582
(-0.64) (-0.15) (0.08) (0.15) (3.51)
Notes. Panel A presents monthly mean excess returns and alphas of the five GRIX-β quintiles, as well as
a hedged portfolio of going long in low GRIX-β assets and short in high GRIX-β assets, across 30 equity
indices, 32 foreign currencies, and 14 bond futures. The benchmark factors used in computing alphas
include the MSCI global equity market excess return, the betting-against-beta (BAB) factor, the time
series momentum (TSMOM) factor, and the value (VE) and momentum (ME) factors of multiple asset
classes. Panel B presents factor loadings of monthly formed portfolios on these factors. We estimate each
asset’s GRIX-β using its past 18 monthly returns. We consider portfolio formation frequencies at the
monthly, quarterly, semi-annual, and annual horizons. Newey-West t-statistics are shown in parentheses.

30
Table 4. Combination of Asset-Class-Level Tail Risk Concerns

Panel A: Asset-Class-Level Tail Risk Concerns


EQRIX FXRIX BDRIX
ExRet Alpha ExRet Alpha ExRet Alpha
Low Beta 0.830 0.398 0.562 0.274 0.633 0.191
(1.74) (1.58) (1.27) (0.93) (1.66) (0.81)
2 0.581 0.346 0.488 0.207 0.521 0.170
(1.95) (1.84) (1.84) (1.51) (2.58) (1.30)
3 0.221 -0.087 0.305 -0.022 0.532 0.185
(0.95) (-0.65) (1.69) (-0.18) (2.18) (1.22)
4 0.293 -0.092 0.185 -0.223 0.122 -0.260
(1.27) (-0.60) (0.67) (-1.55) (0.44) (-1.76)
High Beta 0.104 -0.248 0.476 0.080 0.221 0.024
(0.29) (-1.20) (1.07) (0.36) (0.46) (0.09)
Low-High 0.725 0.646 0.086 0.194 0.411 0.167
(2.75) (2.57) (0.30) (0.64) (1.33) (0.50)
Panel B: Combine Two Asset-Class-Level Tail Risk Concerns
EQBD EQFX BDFX
ExRet Alpha ExRet Alpha ExRet Alpha
Low Beta 0.857 0.344 0.797 0.450 0.766 0.372
(1.96) (1.51) (1.71) (1.64) (1.87) (1.39)
2 0.670 0.409 0.600 0.323 0.522 0.179
(3.02) (2.34) (2.20) (1.98) (2.59) (1.42)
3 0.295 -0.046 0.196 -0.168 0.392 -0.036
(1.28) (-0.33) (0.88) (-1.35) (1.60) (-0.26)
4 0.144 -0.239 0.267 -0.060 0.143 -0.191
(0.52) (-1.38) (0.94) (-0.33) (0.56) (-1.36)
High Beta 0.052 -0.173 0.165 -0.228 0.212 -0.007
(0.12) (-0.75) (0.44) (-1.10) (0.43) (-0.03)
Low-High 0.806 0.517 0.633 0.678 0.553 0.379
(3.73) (2.17) (2.25) (2.55) (1.70) (1.09)
Notes. Panel A reports the excess returns and alphas for the monthly-
formed quintile portfolios based on asset-class-level RIXs, while Panel B re-
ports those based on the common components of two asset-class-level RIXs.
The common components are calculated as the first principal components
of two asset-class-level RIXs, with a total of three combinations, labeled as
“EQBD”, “EQFX”, and “BDFX”, respectively. The portfolios are formed
using all the 76 global assets. Newey-West t-statistics are shown in paren-
theses.

31
Table 5. Pricing Effects of Tail Risk Concerns Within Asset Classes

Panel A: Equity Index


EQRIX GRIX EQ-Specific Component
Low Beta 0.860 1.060 0.777
(1.44) (1.76) (1.22)
2 0.673 0.589 0.514
(1.26) (1.19) (0.98)
3 0.380 0.408 0.460
(0.78) (0.83) (0.94)
High Beta 0.243 0.112 0.400
(0.46) (0.19) (0.76)
Low-High 0.634 0.966 0.394
(2.16) (2.89) (1.19)
Five Factor Alpha 0.554 0.831 0.324
(1.63) (2.58) (0.91)
Panel B: Foreign Currency
FXRIX GRIX FX-Specific Component
Low Beta 0.790 0.667 0.488
(2.66) (2.19) (2.27)
2 0.22 0.46 0.246
(1.07) (2.22) (1.26)
3 0.215 0.297 0.312
(1.22) (1.71) (1.66)
High Beta 0.464 0.290 0.608
(2.08) (1.45) (2.20)
Low-High 0.326 0.377 -0.120
(1.39) (1.80) (-0.69)
Five Factor Alpha 0.317 0.391 -0.165
(1.55) (2.04) (-0.92)
Panel C: Bond Futures
BDRIX GRIX BD-Specific Component
Low Beta 0.382 0.369 0.263
(3.64) (3.34) (2.48)
2 0.197 0.197 0.236
(2.78) (3.03) (3.19)
3 0.148 0.138 0.164
(2.35) (2.17) (2.75)
High Beta 0.13 0.132 0.157
(1.64) (1.53) (1.92)
Low-High 0.253 0.238 0.106
(2.54) (2.17) (1.03)
Five Factor Alpha 0.131 0.123 0.072
(1.27) (1.16) (0.71)
Notes. This table reports the excess returns and alphas for the monthly-formed quartile
portfolios within each asset class. The alphas are benchmarked on the global market
factor, the BAB factor, the TSMOM factor, the value factor, and the momentum factor,
within each asset class. For each asset class, we report portfolios based on the asset-class-
level RIX, the GRIX, and the component of each asset-class-level RIX that is orthogonal
to the GRIX. Newey-West t-statistics are shown in parentheses.

32
Table 6. GRIX-β vs KJ-β of U.S. Stocks
Panel A: Portfolios sorted by KJ-β
EW Ret VW Ret EW Alpha VW Alpha
Low KJ-β 0.408 0.093 -0.111 -0.171
(0.78) (0.20) (-0.87) (-1.19)
2 0.603 0.226 0.14 0.005
(1.53) (0.66) (1.69) (0.07)
3 0.553 0.569 0.091 0.288
(1.39) (1.51) (1.02) (2.25)
4 0.772 0.337 0.278 0.049
(1.79) (0.76) (2.37) (0.29)
High KJ-β 0.803 0.279 0.27 0.066
(1.59) (0.49) (1.71) (0.28)
High-Low 0.395 0.187 0.380 0.237
(1.62) (0.63) (1.62) (0.75)
Panel B: Portfolios sorted by GRIX-β
EW Ret VW Ret EW Alpha VW Alpha
Low GRIX-β 0.615 0.487 0.104 0.072
(1.19) (0.92) (0.77) (0.38)
2 0.601 0.294 0.144 0.007
(1.44) (0.77) (1.32) (0.07)
3 0.663 0.508 0.228 0.264
(1.71) (1.37) (2.13) (2.87)
4 0.541 0.151 0.086 -0.033
(1.34) (0.40) (1.00) (-0.29)
High GRIX-β 0.227 -0.059 -0.247 -0.297
(0.44) (-0.12) (-2.15) (-2.13)
Low-High 0.388 0.545 0.351 0.369
(1.83) (1.67) (1.83) (1.28)
Panel C: Portfolios sorted by SPRIX β
EW Ret VW Ret EW Alpha VW Alpha
Low SPRIX-β 0.731 0.514 0.168 0.127
(1.22) (0.85) (1.12) (0.60)
2 0.686 0.472 0.201 0.198
(1.57) (1.11) (1.91) (1.57)
3 0.578 0.354 0.109 0.068
(1.45) (0.92) (1.08) (0.91)
4 0.493 0.224 0.029 -0.021
(1.23) (0.63) (0.33) (-0.22)
High SPRIX-β 0.293 0.038 -0.216 -0.259
(0.59) (0.09) (-1.74) (-1.84)
Low-High 0.438 0.476 0.384 0.386
(1.67) (1.28) (1.63) (1.26)
Panel D: Fama-MacBeth
(1) (2) (3) (4)
GRIX-β -0.674* -0.364*
(-1.760) (-1.840)
SPRIX-β -1.235** -0.873*
(-2.387) (-1.859)
KJ-β 0.111 0.115** 0.151** 0.136**
(1.648) (2.019) (2.354) (2.346)
Market-β 0.184 0.058 0.128 0.06
(0.919) (0.358) (0.782) (0.510)
Control for Size/BM/Ret(2,12) Yes Yes Yes Yes
Other Controls No Yes No Yes
Avg # of assets 2540 2498 2682 2067
Adj R2 0.036 0.055 0.052 0.064
# of months 185 185 185 185
Notes. Panels A, B, and C reports the equally-weighted and value-weighted quintile portfolios of U.S. stocks
sorted by the KJ-β, the GRIX-β, and the SPRIX-β, respectively. The SPRIX is constructed using S&P 500
index options. We report both raw returns and alphas benchmarked on the Fama and French (1993) and
Carhart (1997) four factors at the monthly horizon. Panel D reports Fama-MacBeth regressions on these βs,
controlling for size, book-to-market ratio, and past-12-month returns, as well as additional firm characteristics,
including operating profitability, investment, accruals, net stock issuance, Amihud’s illiquidity, idiosyncratic
return volatility, systematic skewness, and idiosyncratic skewness.

33
Table 7. Time-Series Evidence

Panel A: Correlation
GRIX KJ LJV
GRIX 1
KJ -0.30 1
LJV 0.77 -0.35 1
Panel B: GRIX vs KJ
12-month U.S. Market Return 12-month Global Market Return
Intercept 6.06 -10.15 -38.76 4.52 -12.49 -42.17
(1.48) (-0.27) (-1.35) (1.07) (-0.32) (-1.47)
GRIX 5.00*** 5.81*** 5.07*** 5.92***
(4.34) (4.98) (4.35) (4.67)
KJ 0.40 1.10* 0.42 1.15*
(0.46) (1.66) (0.46) (1.72)
Adj R2 0.1416 0.0006 0.1769 0.1467 0.0009 0.1848
Panel C: GRIX vs LJV
12-month U.S. Market Return 12-month Global Market Return
Intercept 0.60 5.72 -1.60 2.96
(0.11) (0.96) (-0.28) (0.45)
GRIX 4.81* 4.20
(1.83) (1.41)
LJV 11.73*** 0.73 12.99*** 3.33
(2.98) (0.09) (3.15) (0.37)
Adj R2 0.0866 0.1373 0.1077 0.1452
Notes. Panel A reports the correlations between three tail risk measures, the GRIX
factor, the KJ factor, and the LJV factor proposed in Bollerslev et al. (2015). Panel B
reports the return predictive regressions of the GRIX and KJ factors both separately
and jointly, for the 12-month U.S. stock market return (left panel) and the 12-month
global market return (right panel) proxied by the MSCI world equity index excess return.
Panel C reports similar return predictive regressions using the GRIX and LJV factors.
Newey-West t-statistics are shown in parentheses.

34
Table 8. Exposure to Funding Liquidity Risk

Broker-Dealer Hu-Pan-Wang TED Swap- Libor- Aggregate


Adj. R2
Leverage Shock Noise Spread Treasury Repo Funding Liquidity
(1) 0.02 0.014
(1.04)
(2) -0.36 0.018
(-1.38)
(3) -0.22 -0.11 0.50 0.008
(-0.34) (-0.53) (0.63)
(4) 0.10 0.011
(0.68)
(5) 0.01 -0.29 -0.64 -0.19 1.85 -0.63 0.034
(0.48) (-0.55) (-0.99) (-0.82) (1.36) (-0.55)

Notes. This table reports contemporaneous regressions of the low-minus-high GRIX − β return spread on the
global market return, the broker-dealer leverage shock measure in Adrian et al. (2014), the “noise” measure
in Hu et al. (2013), the TED spread, the Swap-Treasury spread, the Libor-Repo spread, and the aggregate
funding liquidity factor computed as the first principal component of the correlation matrix of the three
spreads. Each row presents a model specification. Coefficients and Newey-West t-statistics are reported for
each liquidity measure (Intercepts and coefficients on global market return are omitted). The adjusted R2 s
are reported in the last column.

35
Table 9. GRIX-β Portfolios for Developed and Emerging Markets

Panel A: Assets from Developed Countries


Monthly Quarterly Semi-annually Annually
Avg Beta ExRet Alpha ExRet Alpha ExRet Alpha ExRet Alpha
Low GRIX-β -0.029 0.762 0.401 0.592 0.207 0.508 0.122 0.454 0.14
(2.37) (2.03) (1.75) (1.10) (1.48) (0.66) (1.32) (0.74)
2 -0.010 0.453 0.216 0.418 0.169 0.365 0.147 0.381 0.134
(2.44) (1.66) (2.27) (1.19) (2.02) (1.07) (2.19) (1.09)
3 -0.002 0.166 -0.264 0.344 -0.07 0.326 -0.069 0.442 0.036
(0.74) (-1.99) (1.66) (-0.59) (1.53) (-0.56) (1.93) (0.25)
4 0.005 0.158 -0.274 0.123 -0.34 0.13 -0.353 0.177 -0.325
(0.59) (-1.44) (0.47) (-1.83) (0.50) (-1.94) (0.70) (-1.88)
High GRIX-β 0.023 -0.122 -0.429 -0.065 -0.339 0.101 -0.199 -0.026 -0.333
(-0.32) (-2.50) (-0.17) (-1.92) (0.26) (-1.07) (-0.07) (-2.08)
Low-High -0.052 0.884 0.831 0.658 0.546 0.407 0.32 0.479 0.474
(3.70) (3.32) (2.87) (2.30) (1.65) (1.30) (2.00) (2.01)
Panel B: Assets from Emerging Countries
Monthly Quarterly Semi-annually Annually
Avg Beta ExRet Alpha ExRet Alpha ExRet Alpha ExRet Alpha
Low GRIX-β -0.047 1.837 1.523 1.706 1.658 1.812 1.660 1.697 1.666
(2.32) (2.24) (2.46) (2.66) (2.65) (2.53) (2.60) (2.98)
2 -0.017 0.975 0.508 0.697 0.137 0.869 0.528 0.789 0.298
(2.12) (1.21) (1.68) (0.36) (1.95) (1.29) (1.74) (0.67)
3 -0.002 0.183 -0.228 0.438 0.313 0.432 -0.140 -0.011 -0.421
(0.30) (-0.37) (0.61) (0.45) (0.66) (-0.21) (-0.02) (-0.64)
4 0.016 0.143 0.290 0.489 0.418 0.439 0.493 0.563 0.570
(0.32) (0.72) (0.91) (0.91) (0.96) (1.36) (1.23) (1.46)
High GRIX-β 0.044 0.392 0.042 0.158 -0.200 -0.029 -0.240 0.085 -0.089
(0.64) (0.07) (0.27) (-0.34) (-0.05) (-0.38) (0.13) (-0.14)
Low-High -0.091 1.460 1.491 1.564 1.887 1.841 1.900 1.613 1.755
(1.77) (1.68) (2.37) (2.43) (2.51) (2.19) (2.37) (2.19)
Notes. Panel A presents GRIX-β quintile portfolios of assets within developed markets, and Panel B
presents those within emerging markets. We report both mean excess returns and alphas at the monthly
horizon. The alphas are benchmarked on five factors, including the MSCI global equity market excess
return, the BAB factor, the TSMOM factor, the VE factor, and the ME factor. Newey-West t-statistics
are shown in parentheses.

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Table 10. Alternative Measures of GRIX
A: Value-Weighted
Monthly Quarterly Semi-annually Annually
ExRet Alpha ExRet Alpha ExRet Alpha ExRet Alpha
Low GRIX-β 0.869 0.486 0.82 0.52 0.786 0.488 0.934 0.65
(1.92) (1.69) (1.87) (1.96) (1.75) (1.72) (2.07) (2.30)
High GRIX-β 0.048 -0.156 0.18 -0.049 0.218 0.02 0.08 -0.141
(0.11) (-0.76) (0.43) (-0.23) (0.54) (0.09) (0.19) (-0.63)
Low-High 0.821 0.642 0.64 0.568 0.567 0.468 0.854 0.791
(2.73) (2.00) (2.22) (1.87) (1.76) (1.32) (2.80) (2.37)
B: Simple Average
Monthly Quarterly Semi-annually Annually
ExRet Alpha ExRet Alpha ExRet Alpha ExRet Alpha
Low GRIX-β 0.959 0.643 0.853 0.601 0.883 0.693 0.805 0.625
(2.16) (2.55) (1.92) (2.54) (1.96) (2.82) (1.84) (2.58)
High GRIX-β 0.118 -0.256 0.210 -0.165 0.233 -0.121 0.154 -0.134
(0.30) (-1.19) (0.57) (-0.82) (0.66) (-0.60) (0.42) (-0.59)
Low-High 0.841 0.899 0.643 0.766 0.65 0.814 0.651 0.76
(3.23) (3.70) (2.65) (3.90) (2.53) (3.83) (2.62) (3.56)
C: Net Tail Measure
Monthly Quarterly Semi-annually Annually
ExRet Alpha ExRet Alpha ExRet Alpha ExRet Alpha
Low GRIX-β 0.981 0.517 0.786 0.405 0.818 0.485 0.679 0.368
(2.33) (2.25) (1.90) (1.83) (1.97) (2.02) (1.70) (1.53)
High GRIX-β 0.208 -0.001 0.235 -0.003 0.197 -0.026 0.148 -0.082
(0.51) (-0.01) (0.59) (-0.01) (0.51) (-0.10) (0.38) (-0.31)
Low-High 0.774 0.518 0.551 0.408 0.621 0.511 0.531 0.449
(3.30) (2.03) (2.60) (1.77) (2.58) (2.06) (2.48) (1.82)
Notes. This table reports quintile portfolios using three alternative GRIX measures. In Panel A, we
compute asset-class-level RIXs as the value-weighted average of individual assets’ tail risk concerns, with
the corresponding country’s GDP value in the previous year as the weight. In Panel B, we use a simple
average of the three asset-class-level RIXs (instead of the first principal component) in constructing the
GRIX measure. In Panel C, we use the net tail (instead of the left tail) in measuring individual assets’ tail
risk concerns and hence the GRIX. For brevity, we only report the quintile portfolios with the lowest and
the highest GRIX-β, as well as the low-minus-high portfolio. We report both mean excess returns and
alphas at the monthly horizon. The alphas are benchmarked on five factors, including the MSCI global
equity market excess return, the BAB factor, the TSMOM factor, the VE factor, and the ME factor.
Newey-West t-statistics are shown in parentheses.

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Appendix A

A Data Sources

We present details of the return and option data on international equity indices, foreign currencies, and
global government bond futures.

A.1 International Equity Indices

We consider 30 international equity indices, including Australia (ASX200), Austria (ATX), Belgium (BEL20),
Canada (TSX60), Denmark (OMXC20), Europe (ESTX50), Finland (OMXH25), France (CAC40), Germany
(DAX), Greece (ASE20), Hong Kong (HSI), India (NSEI), Israel (TA25), Italy (MIB), Japan (N225), Mexico
(IPC), Netherlands (AEX), Nordic Countries (VINX30), Norway (OBX), Poland (WIG20), Russia (RTS),
Singapore (SGX), South Korea (KS200), Spain (IBEX), Sweden (OMXS30), Switzerland (SMI), Taiwan
(TAIEX), Thailand (SET50), the United Kingdom (FTSE100), and the United States (SPX), provided by
MSCI and FTSE through Datastream.
We obtain the index options on these equity indices traded on various exchanges from the Thomson
Reuters Tick History. All index options are written on the major cash index of a country or region, except
those of Mexico, Russia, Singapore, and Spain, which are written on the equity index futures associated with
their cash equity indices.

A.2 Foreign Currencies

We obtain daily spot and one-month forward exchange rates of 32 currencies against USD provided by
Barclays and Reuters through Datastream, including Argentine Peso (ARS), Australian Dollar (AUD),
Brazilian Real (BRL), Canadian Dollar (CAD), Chilean Peso (CLP), Colombian Peso (COP), Czech Koruna
(CZK), Danish Krone (DKK), Euro (EUR), Hong Kong Dollar (HKD), Hungarian Forint (HUF), Icelandic
Krona (ISK), Indian Rupee (INR), Indonesian Rupiah (IDR), Israeli Shekel (ILS), Japanese Yen (JPY),
Malaysian Ringgit (MYR), Mexican Peso (MXN), New Zealand Dollar (NZD), Norwegian Krone (NOK),
Peruvian Nuevo Sol (PEN), Philippine Peso (PHP), Polish Zloty (PLN), Russian Federation Rouble (RUB),
Singaporean Dollar (SGD), South African Rand (ZAR), South Korean Won (KRW), Swedish Krona (SEK),
Swiss Franc (CHF), Taiwanese Dollar (TWD), Thai Baht (THB), and the UK Pound (GBP). Both spot
and forward exchange rates are based on midpoint quotes (i.e., the average of bid and ask rates). Some of
these currencies are pegged partly or completely to USD over our sample period, e.g., ARS, HKD, and PEN.
Similar to Lustig and Verdelhan (2011), we keep them in our sample because forward contracts are easily
accessible to investors (Our results remain unchanged if we exclude these currencies).

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In addition, the currency return in equation (5) is equal to the (log) forward discount minus the spot
rate change
rxkt+1 = Rtf,k − Rtf,U S − ∆skt+1 ,

where Rtf,k and Rtf,U S are the one-month risk-free rates of the foreign country and the United States,
respectively. If covered interest rate parity (CIP) holds, the forward discount is equal to the interest rate
differential: ftk − skt ≈ Rtf,k − Rtf,U S . Based on the large failure of CIP, we delete the following observations
from our sample: Malaysia (August 1998 - June 2005) and Indonesia (December 2000 - May 2007). According
to Akram et al. (2008), the CIP holds at daily and lower frequencies. Although this relation breaks down
during the recent 2007-2008 financial crisis, including or excluding those observations does not change our
empirical results.
We obtain daily prices of the options on these 32 exchange rates, traded over-the-counter, from J.P.
Morgan. These options are written on the exchange rate represented as units of foreign currencies per USD.
Because our main option samples start from January 1996, we do not consider the currencies of Euro zone
countries before 1999 and only keep the Euro series starting from January 1999.

A.3 Global Government Bond Futures

We obtain daily prices of 14 sovereign bond futures and associated futures options from various exchanges,
including Australia 3- and 10-year Treasury Bonds, 10-year Government Bond of Canada, Euro-Bobl, Euro-
Schatz, Euro-Bund, Italy 10-year Government Bond, Japan 10-year Government Bond, Spain 10-year Gov-
ernment Bond, UK Long Gilt, U.S. 2-, 5-, 10-, and 30-year Treasury securities. For German government
bonds (with notional contract values in euros), Schatz has 1.75-2.25 years to maturity, Bobl has 4.5-5.5
years to maturity, and Bund has 8.5-10.5 years to maturity, which we denote as Germany 2YR, 5YR, 10YR
bonds, respectively, for brevity throughout the paper. Note that in bond futures market, these contracts are
subject to the cheapest-to-deliver restriction, which has a certain range of maturity not necessarily equal to
the original maturity underlying these futures contracts.

A.4 Discount Rates

Discount rates are needed when computing the volatility from option prices, or vice versa, using an option
pricing formula. We follow the financial industry standard and use the interbank borrowing rates in each
market as the discount rates for options. In particular, we use the main global interbank interest rates, such
as the LIBOR and EURIBOR, well as zero-coupon rates implied from interest rate swaps. We also use the
local interbank rates NIBOR, SIBOR, and WIBOR for Norway, Singapore, and Poland, respectively.

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B Option Data Cleaning and Numerical Procedure

We clean options data as follows. We first exclude options with missing implied volatility or prices and with
prices less than 0.05 to mitigate the effect of price recording errors. Then, we remove observations in which
option prices violate no-arbitrage bounds. Finally, we consider only options with maturity larger than 7 days
and less than 180 days for liquidity reasons.
We use options written on the front contracts for bond futures, whereas we use options with a 30-day
maturity for equity indices and currencies, in calculating the RIX. We choose options with exactly 30 days
until expiration, if they are available, and otherwise interpolate through two contracts that have the nearest
maturities of 30 days with one longer and the other shorter than 30 days. For each asset’s options, we
exclude trading days with fewer than two option quotes (associated with two different strikes) on a chosen
maturity.
As observed from equation (2), the computation relies on a continuum of moneyness levels. We follow
Carr and Wu (2009) and Gao et al. (2017) to interpolate implied volatilities across the range of observed
moneyness levels. For moneyness levels outside of the available range, we use the implied volatility of the
lowest (highest) moneyness contract for moneyness levels below (above) it. In total, we generate 2,000
implied volatility points equally spaced over a strike range of zero to three times the current spot price each
date, which are used to compute the RIX according to a discretization of equation (2).

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