Stock market tail risk, tail risk premia, and return predictability

In this study, we use the S&P 500 options prices to derive various tail risk indexes. We then decompose the option‐implied tail risk indexes into the conditional tail risk of stock returns and equity tail risk premia. We examine the predictive power of the conditional tail risks and equity tail risk premia for various stock portfolio returns. The results demonstrate that the tail risk indicators possess additional predictive power for stock returns in the presence of extant risk indicators and other return predictor variables.