Abstract
ABSTRACT This paper studies the relationship between tail risk exposure and mutual fund returns using samples from January 2007 to December 2022. The T R jl calculated by Generalized Extreme Value Distribution captures the negative correlation between returns and tail risk, with a one-standard-deviation increase (0.0119) leading to 0.24% decrease in three-factor alpha quarterly. T R jl also captures the nonlinear effect in short term, yet the nonlinearity diminishes due to the reversal of the return-risk exposure curve of equity funds in long term. We propose Loss-Premium Balance Hypothesis, positing that risk loss and premium effect are dominant under different tail risk exposures, respectively.
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