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Volatility vs. Tail Risk: Which One is Compensated in Equity Funds?

Posted: 5 Jun 2013  

James X. Xiong

Ibbotson Associates, a Morningstar company

Thomas Idzorek

Ibbotson Associates - A Morningstar Company

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

Date Written: May 30, 2013

Abstract

Research that has led to what is known as the “low volatility anomaly” in cross-sectional stocks from a similar universe indicates that volatility is not compensated with a “volatility” premium. We find evidence of a risk premium, but it depends on the definition or measure of risk. “Tail risk” measures the probability of having significant losses and should be what investors care about the most. We investigated several risk measures, including volatility and tail risk, and found that volatility is not compensated but tail risk is compensated with higher expected return in both U.S. and non-U.S. equity funds.

Keywords: Volatility, Tail Risk, Equity funds

JEL Classification: G11, G12, G23

Suggested Citation

Xiong, James X. and Idzorek, Thomas and Ibbotson, Roger G., Volatility vs. Tail Risk: Which One is Compensated in Equity Funds? (May 30, 2013). Journal of Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2274295

James X. Xiong (Contact Author)

Ibbotson Associates, a Morningstar company ( email )

22 West Washington Street
Chicago, IL 60602
United States

Thomas Idzorek

Ibbotson Associates - A Morningstar Company ( email )

225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States
312 696-6840 (Phone)
312 696-6701 (Fax)

HOME PAGE: http://www.ibbotson.com

Roger G. Ibbotson

Yale School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6021 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

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