Tail risk hedging for mutual funds using equity market state prices

Michael J. O'Neill*, Zhangxin (Frank) Liu

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)


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
Issue number4
Publication statusPublished - Nov 2016


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