Abstract
This paper shows that most market-data based stock portfolio sorts have a strong tail risk exposure in both tails, while accounting data-based sorts do not. An option-inferred model with non-linear pricing of market risk captures the tail risk patterns and explains many prominent cross-sectional stock return anomalies such as momentum, betting-against-beta, idiosyncratic volatility, and liquidity. A key feature of the model is a sizable upside risk premium of approximately 4% per annum. Finally, the pricing results can be explained with compensation for exposure to systematic variance risk.