We develop a new framework to measure market-wide (systemic) tail risk in the cross-section of high-frequency stock returns. We estimate the time-varying jump intensities of asset prices and introduce a testing approach that identifies multi-asset tail risk based on the release times of scheduled news announcements. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we find that most of the FOMC announcements create systemic left tail risk, but there is no evidence that macro announcements do so. The magnitude of the tail risk induced by Fed news varies over the business cycle, peaks during the global financial crisis and remains high over different phases of unconventional monetary policy. We use our approach to construct a Fed-induced systemic tail risk (STR) indicator. STR helps explain the pre-FOMC announcement drift and significantly increases variance risk premia, particularly for the meetings without press conferences.
https://doi.org/10.20955/wp.2023.016
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