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Do fund managers time implied tail risk? — Evidence from Chinese mutual funds

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  • Ni, Zhongxin
  • Wang, Linyu
  • Li, Weishu

Abstract

This study shows that fund managers can time the market-wide implied tail risk using mutual fund data from China. Managers tend to decrease the market exposure when the market-implied tail risk increases. Furthermore, the implied tail risk timing ability brings significant economic value to investors. The top timer outperforms the bottom timer by approximately 2.77%–3.53% annually on excess returns with 30-day holding periods. Also, our findings are reliable when controlling market timing, volatility timing, and implied tail risk factor. Moreover, we discover that funds exhibiting implied tail risk timing ability tend to have long histories and higher flows. However, managers' financial derivatives background would not help in better timing the implied tail risk.

Suggested Citation

  • Ni, Zhongxin & Wang, Linyu & Li, Weishu, 2021. "Do fund managers time implied tail risk? — Evidence from Chinese mutual funds," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x21000974
    DOI: 10.1016/j.pacfin.2021.101590
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    2. Ni, Zhongxin & Wang, Linyu, 2023. "The predictability of skewness risk premium on stock returns: Evidence from Chinese market," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 576-594.

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