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Tail risk hedging for mutual funds using equity market state prices

Author

Listed:
  • Michael J O’Neill

    (Faculty of Business, Bond University, Australia)

  • Zhangxin (Frank) Liu

    (Business School, The University of Western Australia, Australia)

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.

Suggested Citation

  • Michael J O’Neill & Zhangxin (Frank) Liu, 2016. "Tail risk hedging for mutual funds using equity market state prices," Australian Journal of Management, Australian School of Business, vol. 41(4), pages 687-698, November.
    • Handle: RePEc:sae:ausman:v:41:y:2016:i:4:p:687-698
    DOI: 10.1177/0312896215615170
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    References listed on IDEAS

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    Cited by:

    1. Michael J. O'Neill & Geoffrey J. Warren, 2019. "Evaluating fund capacity: issues and methods," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(S1), pages 773-800, April.

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    More about this item

    Keywords

    mutual fund; state price volatility;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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