Title

Tail risk hedging for mutual funds using equity market state prices

Date of this Version

2016

Document Type

Journal Article

Publication Details

Citation only

O'Neill, M.J, & Liu, Z. F. (2016). Tail risk hedging for mutual funds using equity market state prices. Australian Journal of Management. 1-12

ISSN

0312-8962

Abstract

This paper proposes a method for generating unbiased predictors of downside and tail volatility for individual mutual funds, using theoretical market state prices and applying these to fund payoffs. The method is validated as a predictor of market downside and tail volatility. The Fund Volatility Index-Lower Partial Moment (FVX- ) is then proposed as a forward-looking hedge of downside volatility for funds, calibrated and assessed on a database of 13,202 individual funds. The method proves to be unbiased with high forecast accuracy and is capable of capturing individual fund skewness.

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This document has been peer reviewed.