The Predictive Power of Past Left Tail Risk in the Estimation of Left Tail Risk in Future

The low (high) abnormal returns of stocks with a high (low) left tail risk is a financial anomaly studied in empirical capital asset pricing research. This anomaly is caused by undesirable and unexpected events that incur severe losses for investors, and this loss has the characteristic of continuity. Since the prediction of left-tail risk can help formulate an appropriate trading strategy, this study aims to predict the left-tail risk through past left tail risk information via portfolio analysis and Fama and Macbeth's (1973) regression. To this end, the data of 307 companies of Tehran Stock Exchange and Iran Fara Bourse from 2005 to 2020 were used. The results revealed the ability to predict the left tail risk by past risk information in the research sample. Further exploration by additional portfolio analysis suggested that the future left-tail risk prediction power by past information left-tail risk is greater among stocks with small size characteristics and high unsystematic volatility, but only a small portion of the market is devoted to stocks with these characteristics.