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Tail Risk and the Cross-Section of Mutual Fund Expected Returns

Published online by Cambridge University Press:  24 August 2018

Nikolaos Karagiannis  and
Konstantinos Tolikas
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Abstract

We test for the presence of a tail risk premium in the cross-section of mutual fund returns and find that the top tail risk quintile of funds outperforms the bottom by 4.4% per annum. This premium is not simply a reward for market risk, nor do commonly used risk factors offer an adequate explanation. Our findings hold across double-sorted portfolios formed on tail risk and a number of fund characteristics. We also find that funds susceptible to tail risk tend to be small, young, have high management fees, and have managers who do not risk their own capital.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 425 - 447
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We are grateful to an anonymous referee and Jennifer Conrad (the editor), whose thoughtful and constructive comments helped to substantially improve our article. We also thank Hans Degryse, Chris Florackis, and Alexandros Kostakis for helpful comments.

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