Tail risk hedging for mutual funds using equity market state prices

Michael J O’Neill and Zhangxin (Frank) Liu
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Michael J O’Neill: Faculty of Business, Bond University, Australia
Zhangxin (Frank) Liu: Business School, The University of Western Australia, Australia

Australian Journal of Management, 2016, vol. 41, issue 4, 687-698

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.

Keywords: mutual fund; state price volatility (search for similar items in EconPapers)
JEL-codes: G13 G15 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:41:y:2016:i:4:p:687-698

DOI: 10.1177/0312896215615170

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