Do Investors Care about Tail Risk? Evidence from Mutual Fund Flows

46 Pages Posted: 13 Oct 2020

See all articles by Yong Chen

Yong Chen

Texas A&M University - Department of Finance

Wenting Dai

Nankai University - School of Finance

Date Written: October 10, 2020

Abstract

This paper examines investor attitude toward tail risk in investment decision-making. Based on a large sample of mutual funds, we show that investor flows are significantly sensitive to tail risk in the cross-section, even after controlling for fund performance and characteristics. Using terrorist attacks and COVID-19 as exogenous shocks to the investor fear level, we find that fund flows become increasingly sensitive to tail risk following the shocks, suggesting that fear is a driving force of the tail risk aversion. In particular, the flow-tail risk sensitivity during the onset of COVID-19 is about 4.5-10 times as large as that in other periods. In addition, tail risk is associated with the activeness of mutual fund investment strategies. The results are robust to alternative measures of tail risk. Overall, our findings suggest that investors care about tail risk beyond traditional risks.

Keywords: Tail risk, investor flows, mutual funds, risk aversion, fear

JEL Classification: G11, G12, G23

Suggested Citation

Chen, Yong and Dai, Wenting, Do Investors Care about Tail Risk? Evidence from Mutual Fund Flows (October 10, 2020). Available at SSRN: https://ssrn.com/abstract=3709082 or http://dx.doi.org/10.2139/ssrn.3709082

Yong Chen (Contact Author)

Texas A&M University - Department of Finance ( email )

360 Wehner Building
College Station, TX 77843-4218
United States

HOME PAGE: http://mays.tamu.edu/directory/ychen/

Wenting Dai

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

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