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Is Risk Higher during Non-Trading Periods? The Risk Trade-Off for Intraday versus Overnight Market Returns

Published on Nov 1, 2015in Journal of International Financial Markets, Institutions and Money1.84
· DOI :10.2139/ssrn.2494387
Christoph Riedel3
Estimated H-index: 3
(University of Passau),
Niklas Wagner13
Estimated H-index: 13
(University of Passau)
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Abstract
We study the magnitude of tail risk – particularly lower tail downside risk – that is present in intraday versus overnight market returns and thereby examine the nature of the respective market risk borne by market participants. Using the Generalized Pareto Distribution for the return innovations, we use a GARCH model for the conditional market return components of major stock markets covering the U.S., France, Germany and Japan. Testing for fat-tails and tail index equality, we find that overnight return innovations exhibit significant tail risk, while intraday innovations do not. We illustrate this volatility versus tail risk trade-off based on conditional Value-at-Risk calculations. Our results show that overnight downside market risk is composed of a moderate volatility risk component and a significant tail risk component. We conclude that market participants face different intraday versus overnight risk profiles and that a risk assessment based on volatility only will severely underestimate overnight downside risk.
  • References (30)
  • Citations (6)
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References30
Newest
#1Philipp Hartmann (ECB: European Central Bank)H-Index: 20
#2Stefan Straetmans (UM: Maastricht University)H-Index: 13
Last.Vries de Casper G (CES: Center for Economic Studies)H-Index: 35
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#1Turan G. Bali (CUNY: City University of New York)H-Index: 34
#2Salih N. Neftci (CUNY: City University of New York)H-Index: 6
Cited By6
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#1Hui Xiong (BIT: Beijing Institute of Technology)
#2Lu Ma (Beijing Jiaotong University)
Last.Jinxian Weng (Shanghai Maritime University)
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#1Laurence E. Blose (GV: Grand Valley State University)H-Index: 6
#2Vijay Gondhalekar (GV: Grand Valley State University)H-Index: 4
Last.Alan Kort (Fifth Third Bank)
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#1Hasan DinçerH-Index: 9
#2Ümit HacıoğluH-Index: 8
Last.Dursun Delen (Oklahoma State University–Tulsa)H-Index: 32
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