Measuring Tail Risk

In this study we comprehensively investigate the usefulness of the tail risk measures proposed in the literature, evaluating the tail risk measures on the basis of their statistical and economic validity. Our main conclusion is that the option-implied measure of Bollerslev and Todorov (2011b) outperforms all others. It performs well for all tests and can predict not only the occurrence but also the size of future crash events. In addition, the measure is priced in the market: it predicts returns both in the time-series and in the cross-section. Finally, it also has an impact on real economic activity.