Do Investors Gain by Selling the Tails of Return Distributions

Abstract

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