Measuring Tail Risk

We comprehensively investigate the usefulness of tail risk measures proposed in the literature. We evaluate both the statistical and the economic validity of the measures. The option-implied measure of Bollerslev and Todorov (2011b) (BT11Q) performs the best overall. While some other tail risk measures excel at specialized tasks, BT11Q performs well in all tests: First, the BT11Q measure can predict both future tail events and future tail volatility. Second, it is priced in the market and has predictive power for returns in both the time series and the cross-section. Finally, it can also predict real economic activity