Tail risk hedging for mutual funds using equity market state prices

Michael J. O’Neill, Zhangxin (Frank) Liu

Research output: Contribution to journalArticle

4 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)687-698
Number of pages12
JournalAustralian Journal of Management
Volume41
Issue number4
DOIs
Publication statusPublished - 1 Nov 2016

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