Essays in tail risks.
详细信息
文摘
The first essay is titled "Tail Risks across Investment Funds." 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. 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. 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,I find 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. The second essay,titled "Fund Convexity and Tail Risk-Taking," studies how a fund manager takes skewed bets in two dimensions. First,the fund manager constantly reexamines fund performance relative to his or her peers and takes a position with respect to skewness risk. I show that when a fund manager underperforms peers,he or she will gamble on trades with lottery-like returns. On the other hand,when a fund outperforms peer funds,the fund manager will take negatively skewed trades. The results are robust to different econometric specifications. Second,I examine how convexity in incentives affects tail risks across and within different types of investment funds. The literature has documented different forms of convexity that a fund manager faces: discounts in closed-end funds,tournaments and fund flow-performance relation in open-ended funds,and high-water mark provisions in hedge funds. Sorting funds by the degree of convexity and comparing skewness between the group with the most convexity and the group with the least convexity,I conclude that convexity affects fund tail risks. This result suggests that both implicit and explicit convexities provide incentives for fund managers to take systematic and idiosyncratic bets with tail risks.