Tail risk hedging for mutual funds using equity market state prices

2016 ◽  
Vol 41 (4) ◽  
pp. 687-698 ◽  
Author(s):  
Michael J O’Neill ◽  
Zhangxin (Frank) Liu
Keyword(s):  
Mutual Funds ◽  
Equity Market ◽  
Tail Risk ◽  
Risk Hedging ◽  
Market State

Tail Risk Hedging: Contrasting Put and Trend Strategies

2021 ◽  
Vol 1 (1) ◽  
pp. 111-124
Author(s):  
Antti Ilmanen ◽  
Ashwin Thapar ◽  
Harsha Tummala ◽  
Dan Villalon
Keyword(s):  
Equity Market ◽  
Common View ◽  
Risk Hedging ◽  
Average Return ◽  
Economic Rationale ◽  
Research Findings ◽  
The Common ◽  
Tail Events ◽  
The Cost

We summarize key research findings on risk-mitigating strategies and offer an overview of the strengths and weaknesses of regular index put buying (“Put”) and multi-asset trend following (“Trend”) as tail hedges. The two biggest questions we address are: (1) What is the long-term average return or cost, and (2) How reliable and efficient is the hedge in equity market tail events? We present empirical answers and discuss the economic rationale for each question. The common view that Put costs more but is a more effective tail hedge contains a kernel of truth but does not capture the full story. We will give a more nuanced picture, including practicality for investors, but in the end show the cost advantage favors Trend over Put.

Tail Risk Hedging Performance: Measuring What Counts

2021 ◽  
Author(s):  
Linda Chang ◽  
Jeremie Holdom ◽  
Vineer Bhansali
Keyword(s):  
Tail Risk ◽  
Risk Hedging ◽  
Hedging Performance

The Response of Tail Risk Perceptions to Unconventional Monetary Policy

2016 ◽  
Vol 8 (2) ◽  
pp. 111-136 ◽  
Author(s):  
Masazumi Hattori ◽  
Andreas Schrimpf ◽  
Vladyslav Sushko
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Risk Perceptions ◽  
Equity Market ◽  
Unconventional Monetary Policy ◽  
Tail Risk ◽  
Forward Guidance ◽  
The Impact ◽  
Future Path

We examine the impact of unconventional monetary policy (UMP) on stock market tail risk and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14)

The value of tail risk hedging in defined contribution plans: what does history tell us

2014 ◽  
Vol 14 (3) ◽  
pp. 240-265 ◽  
Author(s):  
ANUP K. BASU ◽  
MICHAEL E. DREW
Keyword(s):  
Global Financial Crisis ◽  
Rare Event ◽  
Equity Markets ◽  
Investment Horizon ◽  
Defined Contribution ◽  
Tail Risk ◽  
Put Options ◽  
Historical Simulation ◽  
Risk Hedging ◽  
The Great Depression

AbstractHedging against tail events in equity markets has been forcefully advocated in the aftermath of recent global financial crisis. Whether this is beneficial to long horizon investors like employees enrolled in defined contribution (DC) plans, however, has been subject to criticism. We conduct historical simulation since 1928 to examine the effectiveness of active and passive tail risk hedging using out of money put options for hypothetical equity portfolios of DC plan participants with 20 years to retirement. Our findings show that the cost of tail hedging exceeds the benefits for a majority of the plan participants during the sample period. However, for a significant number of simulations, hedging result in superior outcomes relative to an unhedged position. Active tail hedging is more effective when employees confront several panic-driven periods characterized by short and sharp market swings in the equity markets over the investment horizon. Passive hedging, on the other hand, proves beneficial when they encounter an extremely rare event like the Great Depression as equity markets go into deep and prolonged decline.

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