Common Idiosyncratic Quantile Factors and Asset Prices

Jozef Barunik and Matej Nevrla

♦ We investigate whether the tails of firm-level idiosyncratic return distributions are driven by common shocks. We use quantile factor analysis to extract such common idiosyncratic quantile factors with asymmetric pricing effects, and we find a significant premium for innovations to the lower-tail factor: high-beta stocks outperform low-beta stocks by approximately 7-8% per year. This premium remains significant even when controlling for standard factors, idiosyncratic volatility, and tail-risk measures. The downside factor strengthens when intermediary capital is weak and market liquidity is low, and it predicts aggregate market excess returns.

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