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ESSAYS IN TAIL RISKS
by
Jerchern Lin
A Dissertation Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(BUSINESS ADMINISTRATION)
August 2012
Copyright 2012 Jerchern Lin
Object Description
| Title | Essays in tail risks |
| Author | Lin, Jerchern |
| Author email | jercherl@usc.edu;jerchern@buffalo.edu |
| Degree | Doctor of Philosophy |
| Document type | Dissertation |
| Degree program | Business Administration |
| School | Marshal School of Business |
| Date defended/completed | 2012-06-15 |
| Date submitted | 2012-07-27 |
| Date approved | 2012-07-30 |
| Restricted until | 2012-07-30 |
| Date published | 2012-07-30 |
| Advisor (committee chair) | Ferson, Wayne |
| Advisor (committee member) |
Zapatero, Fernando Jones, Chris |
| Abstract | The first essay is titled ""Tail Risks across Investment Funds."" Managed portfolios are subject to tail risks, which can be either index level (systematic) or fund-specific. Examples of fund-specific extreme events include those due to big bets or fraud. This paper studies the two components in relation to compensation structure in managed portfolios. A simple model generates fund-specific tail risk and its asymmetric dependence on the market, and makes predictions for where such risks should be concentrated. The model predicts that systematic tail risks increase with an increased weight on systematic returns in compensation and idiosyncratic tail risks increase with the degree of convexity in contracts. The model predictions are supported with empirical results. Hedge funds are subject to higher idiosyncratic tail risks and Exchange Traded Funds exhibit higher systematic tail risks. In skewness and kurtosis decompositions, I find that coskewness is an important source for fund skewness, but fund kurtosis is driven by cokurtosis, as well as volatility comovement and residual kurtosis, with the importance of these components varying across fund types. Investors are subject to different sources of skewness and fat tail risks through delegated investments. Volatility based tail risk hedging is not effective for all fund styles and types. ❧ The second essay, titled ""Fund Convexity and Tail Risk-Taking"" studies how a fund manager takes skewed bets in two dimensions. First, the fund manager constantly reexamines fund performance relative to his or her peers and takes a position with respect to skewness risk. I show that when a fund manager underperforms peers, he or she will gamble on trades with lottery-like returns. On the other hand, when a fund outperforms peer funds, the fund manager will take negatively skewed trades. The results are robust to different econometric specifications. Second, I examine how convexity in incentives affects tail risks across and within different types of investment funds. The literature has documented different forms of convexity that a fund manager faces: discounts in closed-end funds, tournaments and fund flow-performance relation in open-ended funds, and high-water mark provisions in hedge funds. Sorting funds by the degree of convexity and comparing skewness between the group with the most convexity and the group with the least convexity, I conclude that convexity affects fund tail risks. This result suggests that both implicit and explicit convexities provide incentives for fund managers to take systematic and idiosyncratic bets with tail risks. |
| Keyword | mutual funds; hedge funds; investment funds; skewness; kurtosis; coonvex incentives; managerial compensation; coskewness; cokurtosis; tournament; high water marks; closed-end fund discounts; flow and performance relationship; risk taking |
| Language | English |
| Part of collection | University of Southern California dissertations and theses |
| Publisher (of the original version) | University of Southern California |
| Place of publication (of the original version) | Los Angeles, California |
| Publisher (of the digital version) | University of Southern California. Libraries |
| Provenance | Electronically uploaded by the author |
| Type | texts |
| Legacy record ID | usctheses-m |
| Rights | Lin, Jerchern |
| Access conditions | The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the author, as the original true and official version of the work, but does not grant the reader permission to use the work if the desired use is covered by copyright. It is the author, as rights holder, who must provide use permission if such use is covered by copyright. The original signature page accompanying the original submission of the work to the USC Libraries is retained by the USC Libraries and a copy of it may be obtained by authorized requesters contacting the repository e-mail address given. |
| Repository name | University of Southern California Digital Library |
| Repository address | USC Digital Library, University of Southern California, University Park Campus MC 7002, 106 University Village, Los Angeles, California 90089-7002, USA |
| Repository email | cisadmin@usc.edu |
| Archival file | uscthesesreloadpub_Volume4/etd-LinJercher-1053-0.pdf |
Description
| Title | Page 1 |
| Full text | ESSAYS IN TAIL RISKS by Jerchern Lin A Dissertation Presented to the FACULTY OF THE USC GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (BUSINESS ADMINISTRATION) August 2012 Copyright 2012 Jerchern Lin |
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