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Bertrand Groslambert, Devraj Basu and Wan Ni Lai
''Is tail risk the missing link between institutions and risk?''
( 2019, Vol. 39 No.2 )
This paper examines the link between risk and institutional quality, an unresolved issue in finance. Our hypothesis is that institutions affect risk through extreme events and less through volatility. We focus on relative tail risk with an original approach that is able to estimate historical tail risk with greater precision. Using international stock market data, we show that tail risk is stable over time, unlike volatility. We find that tail risk captures the relation between risk and institutional quality better than volatility. Better governance substantially reduces the probability of extreme events.
Keywords: Stock markets, Tail risk, Institutional quality, Governance
JEL: G2 - Financial Institutions and Services: General
F3 - International Finance: General
Manuscript Received : Mar 12 2019 Manuscript Accepted : Jun 15 2019

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