Caution under Ambiguity and Blowups
37 Pages Posted: 8 Jul 2021 Last revised: 13 Aug 2021
Date Written: June 27, 2021
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: Suggested Citation