Download or read book Tail Risk and the Cross Section of Mutual Fund Expected Returns written by Nikolaos Karagiannis and published by . This book was released on 2018 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: We test for the presence of a tail risk premium in the cross-section of mutual fund returns and find that the top tail risk quintile of funds outperforms the bottom by 4.4% per annum. This premium is not simply a reward for market risk, nor do commonly used risk factors offer an adequate explanation. Our findings hold across double-sorted portfolios formed on tail risk and a number of fund characteristics. We also find that funds susceptible to tail risk tend to be small, young, have high management fees, and have managers who do not risk their own capital.
Download or read book Luck Versus Skill in the Cross Section of Mutual Fund Returns written by Eugene F. Fama and published by . This book was released on 2010 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: The aggregate portfolio of U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark adjusted expected returns sufficient to cover their costs. If we add back the costs in expense ratios, there is evidence of inferior and superior performance (non-zero true alpha) in the extreme tails of the cross section of mutual fund alpha estimates.
Download or read book The Cross Section of Tail Risks in Stock Returns written by Kyle Moore and published by . This book was released on 2013 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates how the downside tail risk of stock returns is differentiated cross-sectionally. Stock returns follow heavy-tailed distributions with downside tail risk determined by the tail shape and scale. If safety-first investors are concerned with sufficiently large downside losses, i.e. have a sufficiently low risk tolerance, then in the equilibrium, assets traded in the same market share a homogeneous tail shape parameter. Furthermore, if tail shapes are homogeneous, the equilibrium prices of assets are differentiated by the scales.
Download or read book Aggregate Tail Risk and Expected Returns written by David A. Chapman and published by . This book was released on 2016 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the connection between tail risk -- as measured in Kelly and Jiang (2014) -- and the cross-section of expected returns. In conditional predictive regression systems and vector-autoregressions of the market portfolio and the long- and shoresides of the Fama-French factor portfolios, the tail measure has very weak marginal explanatory power. If anything, tail risk appears to forecast discount rates -- and not cash flows -- which seems inconsistent with crash-based explanations of the importance of tail risk. We also compare the time series of tail risk to measures of aggregate uncertainty, a measure of funding risk, and three Treasury term structure factors. Tail risk Granger causes and is Granger caused by the level of the term structure, and the slope of the term structure Granger causes tail risk.
Download or read book Extreme Correlation of International Equity Markets written by François M. Longin and published by . This book was released on 2000 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Swing Pricing and Fragility in Open end Mutual Funds written by Dunhong Jin and published by International Monetary Fund. This book was released on 2019-11-01 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.
Download or read book Tail Risk and Asset Prices written by Bryan Kelly and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new measure of time-varying tail risk that is directly estimable from the cross section of returns. We exploit firm-level price crashes every month to identify common fluctuations in tail risk across stocks. Our tail measure is significantly correlated with tail risk measures extracted from S&P 500 index options, but is available for a longer sample since it is calculated from equity data. We show that tail risk has strong predictive power for aggregate market returns: A one standard deviation increase in tail risk forecasts an increase in excess market returns of 4.5% over the following year. Cross-sectionally, stocks with high loadings on past tail risk earn an annual three-factor alpha 5.4% higher than stocks with low tail risk loadings. These findings are consistent with asset pricing theories that relate equity risk premia to rare disasters or other forms of tail risk.
Download or read book Nonparametric Tail Risk Stock Returns and the Macroeconomy written by Caio Almeida and published by . This book was released on 2016 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Systematic Tail Risk written by Chen Zhou and published by . This book was released on 2013 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Tail Risk in the Cross Section of Alternative Risk Premium Strategies written by Nick Baltas and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this article the authors attempt to get a better understanding of the cross-section of alternative risk premia using a multi-asset version of the downside risk CAPM. In line with the empirical literature, they find that the cross-section of realized returns is much better explained when using the downside risk CAPM, rather than relying on the traditional CAPM. However, in contrast to the empirical literature, the authors cannot always recover the required signs in their cross-sectional regressions. In particular, we find that taking on downside risk is not always systematically rewarded. This might either be due to the limited availability of time series that essentially overweight the exceptional events of 2008 or a direct result of creating back-tests with attractive in-sample features that are impossible to be repeated out-of-sample.
Download or read book High Returns from Low Risk written by Pim van Vliet and published by John Wiley & Sons. This book was released on 2017-01-17 with total page 180 pages. Available in PDF, EPUB and Kindle. Book excerpt: Believing "high-risk equals high-reward" is holding your portfolio hostage High Returns from Low Risk proves that low-volatility, low-risk portfolios beat high-volatility portfolios hands down, and shows you how to take advantage of this paradox to dramatically improve your returns. Investors traditionally view low-risk stocks as safe but unprofitable, but this old canard is based on a flawed premise; it fails to see beyond the monthly horizon, and ignores compounding returns. This book updates the thinking and brings reality to modelling to show how low-risk stocks actually outperform high-risk stocks by an order of magnitude. Easy to read and easy to implement, the plan presented here will help you construct a portfolio that delivers higher returns per unit of risk, and explains how to achieve excellent investment results over the long term. Do you still believe that investors are rewarded for bearing risk, and that the higher the risk, the greater the reward? That old axiom is holding you back, and it is time to start seeing the whole picture. This book shows you, through deep historical simulation, how to reap the rewards of smarter investing. Learn how and why low-risk, low-volatility stocks beat the market Discover the formula that outperforms Greenblatt's Construct your own low-risk portfolio Select the right ETF or low-risk fund to manage your money Great returns and lower risk sound like a winning combination — what happens once everyone is doing it? The beauty of the low-risk strategy is that it continues to work even after the paradox is widely known; long-term investment success is possible for anyone who can shake off the entrenched wisdom and go low-risk. High Returns from Low Risk provides the proof, model and strategy to reign in your exposure while raking in the profit.
Download or read book Hybrid Tail Risk and Expected Stock Returns written by Turan G. Bali and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We introduce a new, hybrid measure of stock return tail covariance risk, motivated by the under-diversified portfolio holdings of individual investors, and investigate its cross-sectional predictive power. Our key innovation is that this covariance is measured across the left tail states of the individual stock return distribution, not across those of the market return as in standard systematic risk measures. We document a positive and significant relation between hybrid tail covariance risk (H-TCR) and expected stock returns, with an annualized premium of 9%, in contrast to the insignificant or negative results for purely stock-specific or systematic tail risk measures.
Download or read book Two Essays on the Cross section of Stock Returns written by Zhuo Tan and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of two essays that address issues related to the cross-section of stock returns. The first essay documents that actively managed mutual funds invest disproportionately in stocks with high historical risk-adjusted returns (alpha). This alpha-chasing behavior has a destabilizing effect on stock price. Specifically, low-alpha stocks earn higher subsequent returns than high-alpha stocks up to two months following portfolio formation—i.e. alpha is not persistent, but reverses. Consistent with liquidity-based price pressure, I find that low- (high)-alpha stocks that are heavily traded by mutual funds exhibit strong subsequent return reversals. Further analysis finds that trades from a few large funds are the primary source of this trading. However, there is no evidence to support the view that herding by fund managers explains fund managers’ preference for high-alpha stocks. The reason why managers of large mutual funds chase high-alpha stocks when alpha is not persistent remains a puzzle. The second essay shows that a better measure of mispricing confirms the primary prediction of the limits-of-arbitrage hypothesis that high levels of idiosyncratic risk prevent arbitrage activity. Rather than using returns to size, B/M and momentum portfolios, I construct a mispricing measure based on the difference between a stock’s price and its intrinsic value estimated using the residual income model of Ohlson (1995). I confirm that this measure explains future returns. I then use it and idiosyncratic return volatility to proxy for mispricing and arbitrage risk, respectively. I find that expected returns to undervalued (overvalued) stocks monotonically increase (decrease) with idiosyncratic risk. These findings support the limits-of-arbitrage hypothesis and that idiosyncratic risk is an impediment to arbitrage.
Download or read book Tail Risks Asset Prices and Investment Horizons written by Jozef Baruník and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine how extreme market risks are priced in the cross-section of asset returns at various horizons. Based on the frequency decomposition of covariance between indicator functions, we define the quantile cross-spectral beta of an asset capturing tail-specific as well as horizon-, or frequency-specific risks. Further, we work with two notions of frequency-specific extreme market risks. First, we define tail market risk that captures dependence between extremely low market as well as asset returns. Second, extreme market volatility risk is characterized by dependence between extremely high increments of market volatility and extremely low asset return. Empirical findings based on the datasets with long enough history, 30 Fama-French Industry portfolios, and 25 Fama-French portfolios sorted on size and book-to-market support our intuition. Results suggest that both frequency-specific tail market risk and extreme volatility risks are significantly priced and our five-factor model provides improvement over specifications considered by previous literature.
Download or read book Predicting Equity Risk Premium Using the Smooth Cross Sectional Tail Risk written by José Afonso Faias and published by . This book was released on 2018 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide a new monthly cross-sectional measure of stock market tail risk, defined as the average of the daily cross-sectional tail risk, rather than the tail risk of the pooled daily returns within a month. The former better captures monthly tail risk rather than merely the tail risk on specific days within a month. Using simulations, we attest that this is due to the low value of daily correlations. We show that this difference is important in generating strong in- and out-of-sample predictability and performs better than the historical risk premium and other commonly used predictors for short- and long-term horizons. This strong predictability improves investor performance in a mean-variance setting.
Download or read book Volatility Vs Tail Risk written by James X. Xiong and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Research that has led to what is known as the “low volatility anomaly” in cross-sectional stocks from a similar universe indicates that volatility is not compensated with a “volatility” premium. We find evidence of a risk premium, but it depends on the definition or measure of risk. “Tail risk” measures the probability of having significant losses and should be what investors care about the most. We investigated several risk measures, including volatility and tail risk, and found that volatility is not compensated but tail risk is compensated with higher expected return in both U.S. and non-U.S. equity funds.
Download or read book Extracting Tail Risk from High Frequency S P 500 Returns written by Caio Almeida and published by . This book was released on 2020 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes to extract tail risk from a risk-neutral mean-adjusted expected shortfall of high-frequency stock returns. Risk adjustment is based on a nonparametric estimator of the state price density that does not use option prices and relies solely on a stock index returns. This makes the measure methodology applicable to many financial markets with illiquid or nonexistent options. Empirically, the tail risk factor extracted from S &P 500 returns has a 90% correlation with the options-based VIX index and predicts well realized jumps in the stock market index at various frequencies. We document a persistent negative relation between tail risk and one-day ahead returns of several assets classes. Consistent with the crash-insurance property of put options, tail risk predicts positive one-day ahead returns for portfolios long out-of-the-money, short in-the-money put options. An analysis of equity portfolios sorted on exposure to tail risk reveals a premium for bearing such a risk, even after controlling for known and established factors related to cross-sectional variability. This cross-sectional analysis is robust to the inclusion of uncertainty indexes, as well as macroeconomic and volatility measures.
