Abstract
The aggregate tail risk measure constructed in Kelly and Jiang (2014) has no additional explanatory power when added to a standard model of the unconditional crosssection of expected returns. In conditional predictive regression systems and vectorautoregressions of the market portfolio and the long- and short-sides of the SMB and HML portfolios, the tail measure appears to forecast expected returns ‐ and not cash flows ‐ on both small and large stocks and on growth stocks. This is inconsistent with a rare disaster model of asset prices which should operate primarily through a cash flow channel. The tail measure appears to be related to decades long movements in expected returns which may be more consistent with a long-run risks model.
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