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Robust leverage choice of hedge funds with rare disasters

Jingzhou Yan, Congming Mu, Qianhui Yan and Deqing Luo

Finance Research Letters, 2023, vol. 54, issue C

Abstract: We study the effects of hedge fund manager’s ambiguity aversion for jump and diffusion risks on the leverage policy under a high-water mark contract. We find that the jump risk has an inverted U-shaped effect on the leverage choice, which can be explained by the variance effect and skewness effect. Our result also indicates that diffusion ambiguity aversion has a larger negative impact on leverage than jump ambiguity aversion. Manager’s ambiguity aversion in jump risk amplifies the skewness effect when the price jump is positive. Our findings provide some insights into the risk taking strategy of hedge fund under ambiguity.

Keywords: High-water mark; Hedge fund; Leverage; Ambiguity aversion; Rare disasters (search for similar items in EconPapers)
JEL-codes: G01 G11 G23 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323000636

DOI: 10.1016/j.frl.2023.103689

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