Do Investors Gain by Selling the Tails of Return Distributions
53 Pages Posted: 8 Jul 2021 Last revised: 8 Aug 2023
Date Written: June 27, 2022
This paper examines the money management question of whether investors gain by selling the tails of return distributions. To address this, we develop a way of ranking and scoring actively managed funds and investment strategies, which accounts for ambiguity aversion and risk aversion in decision-making. Using data relating to options on the S&P 500 equity index and Treasury bond futures, we provide evidence that suggests a negative answer to this question. We reinforce this evidence with data from options on the STOXX 50, FTSE, and Nikkei equity indexes.
Keywords: Blowups, ambiguity aversion, performance measure, selling return tails
JEL Classification: G12, G13, G14, G24, G32
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