Tail Risks Across Investment Funds
The purpose of the article. Managed portfolios are subject to tail risks, which can be either index level (systematic) or fund-specific. Examples of fund-specific extreme events include those due to big bets or fraud. This paper studies the two components in relation to compensation structure in man...
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| Format: | Article |
| Language: | deu |
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Lodz University Press
2024-12-01
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| Series: | Finanse i Prawo Finansowe |
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| Online Access: | https://czasopisma.uni.lodz.pl/fipf/article/view/24783 |
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| author | Jerchern Lin |
| author_facet | Jerchern Lin |
| author_sort | Jerchern Lin |
| collection | DOAJ |
| description | The purpose of the article. Managed portfolios are subject to tail risks, which can be either index level (systematic) or fund-specific. Examples of fund-specific extreme events include those due to big bets or fraud. This paper studies the two components in relation to compensation structure in managed portfolios.
Methodology. A novel methodology is developed to decompose return skewness and kurtosis into various systematic and idiosyncratic components and applied it to the returns of different fund types to assess the significance of these sources. In addition, a simple model generates fund-specific tail risk and its asymmetric dependence on the market, and makes predictions for where such risks should be concentrated. The model predicts that systematic tail risks increase with an increased weight on systematic returns in compensation and idiosyncratic tail risks increase with the degree of convexity in contracts.
Results of the research. The model predictions are supported with empirical results. Hedge funds are subject to higher idiosyncratic tail risks and Exchange Traded Funds exhibit higher systematic tail risks. In skewness and kurtosis decompositions, the results indicate that coskewness is an important source for fund skewness, but fund kurtosis is driven by cokurtosis, as well as volatility comovement and residual kurtosis, with the importance of these components varying across fund types. Investors are subject to different sources of skewness and fat tail risks through delegated investments. Volatility based tail risk hedging is not effective for all fund styles and types. |
| format | Article |
| id | doaj-art-01054c2bbd954b39b731f146887ee2b1 |
| institution | Kabale University |
| issn | 2391-6478 2353-5601 |
| language | deu |
| publishDate | 2024-12-01 |
| publisher | Lodz University Press |
| record_format | Article |
| series | Finanse i Prawo Finansowe |
| spelling | doaj-art-01054c2bbd954b39b731f146887ee2b12025-01-29T13:37:24ZdeuLodz University PressFinanse i Prawo Finansowe2391-64782353-56012024-12-017714310.18778/2391-6478.S1.2024.0525353Tail Risks Across Investment FundsJerchern Lin0https://orcid.org/0000-0002-2281-7068University of Illinois at Chicago The purpose of the article. Managed portfolios are subject to tail risks, which can be either index level (systematic) or fund-specific. Examples of fund-specific extreme events include those due to big bets or fraud. This paper studies the two components in relation to compensation structure in managed portfolios. Methodology. A novel methodology is developed to decompose return skewness and kurtosis into various systematic and idiosyncratic components and applied it to the returns of different fund types to assess the significance of these sources. In addition, a simple model generates fund-specific tail risk and its asymmetric dependence on the market, and makes predictions for where such risks should be concentrated. The model predicts that systematic tail risks increase with an increased weight on systematic returns in compensation and idiosyncratic tail risks increase with the degree of convexity in contracts. Results of the research. The model predictions are supported with empirical results. Hedge funds are subject to higher idiosyncratic tail risks and Exchange Traded Funds exhibit higher systematic tail risks. In skewness and kurtosis decompositions, the results indicate that coskewness is an important source for fund skewness, but fund kurtosis is driven by cokurtosis, as well as volatility comovement and residual kurtosis, with the importance of these components varying across fund types. Investors are subject to different sources of skewness and fat tail risks through delegated investments. Volatility based tail risk hedging is not effective for all fund styles and types.https://czasopisma.uni.lodz.pl/fipf/article/view/24783tail risksystematic riskidiosyncratic riskcoskewnesscokurtosiscopulatail dependenceetfsclosed-end fundsmutual fundshedge fundscompensation |
| spellingShingle | Jerchern Lin Tail Risks Across Investment Funds Finanse i Prawo Finansowe tail risk systematic risk idiosyncratic risk coskewness cokurtosis copula tail dependence etfs closed-end funds mutual funds hedge funds compensation |
| title | Tail Risks Across Investment Funds |
| title_full | Tail Risks Across Investment Funds |
| title_fullStr | Tail Risks Across Investment Funds |
| title_full_unstemmed | Tail Risks Across Investment Funds |
| title_short | Tail Risks Across Investment Funds |
| title_sort | tail risks across investment funds |
| topic | tail risk systematic risk idiosyncratic risk coskewness cokurtosis copula tail dependence etfs closed-end funds mutual funds hedge funds compensation |
| url | https://czasopisma.uni.lodz.pl/fipf/article/view/24783 |
| work_keys_str_mv | AT jerchernlin tailrisksacrossinvestmentfunds |