Caution under Ambiguity and Blowups

37 Pages Posted: 8 Jul 2021 Last revised: 13 Aug 2021

See all articles by Gurdip Bakshi

Gurdip Bakshi

Temple University - Fox School of Business and Management; Fox School of Business

John Crosby

University of Maryland - Robert H. Smith School of Business

Xiaohui Gao

Fox School of Business, Temple University

Date Written: June 27, 2021

Abstract

We develop an axiomatically consistent way of ranking and scoring actively managed funds and investment strategies. Our performance measure accounts for the feature that investors may exhibit caution, via the mechanism of ambiguity aversion, when evaluating investment strategies. Linking developed theory to data, we feature evidence on a real-world question: Do investors gain by selling the tails of return distributions? Using data on options on (i) the S&P 500 equity index, and (ii) Treasury bond futures, our answer to this question is in the negative. We complement our evidence from options on STOXX 50, FTSE, and Nikkei equity indexes.

Keywords: ambiguity, tail risk

JEL Classification: G11, G12

Suggested Citation

Bakshi, Gurdip S. and Crosby, John and Gao, Xiaohui, Caution under Ambiguity and Blowups (June 27, 2021). Available at SSRN: https://ssrn.com/abstract=3874848 or http://dx.doi.org/10.2139/ssrn.3874848

Gurdip S. Bakshi

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

John Crosby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

Xiaohui Gao (Contact Author)

Fox School of Business, Temple University ( email )

Philadelphia, PA 19122
United States

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