Is tail risk priced in the cross-section of Chinese mutual fund returns?

Abstract

We investigate the pricing of tail risk in the cross-section of Chinese mutual fund returns using a sample of 2563 funds from 2007 to 2021. We document a strong and positive relationship between the time-varying tail risk beta and one-month-ahead mutual fund return, which is robust to various considerations. Specifically, the top tail risk quintile portfolio outperforms the bottom one by 1.85% per month. We also note that Chinese mutual funds with high tail risk loadings tend to be young, have high management fees, low fund flows, and substantial return volatility. However, unlike the U.S. market, fund size and managerial ownership do not directly relate to tail risk exposure in China.