Risk-Taking of Hedge Funds: Empirical Evidence vs. Theoretical Modeling

2021 ◽  
Author(s):  
Jens Carsten Jackwerth
Keyword(s):  
Empirical Evidence ◽  
Risk Taking ◽  
Hedge Funds ◽  
Theoretical Modeling

Stock and Option Proportions in Executive Compensation

2011 ◽  
Vol 01 (01) ◽  
pp. 169-203 ◽  
Author(s):  
Phelim P. Boyle ◽  
Ranjini Jha ◽  
Shannon Kennedy ◽  
Weidong Tian
Keyword(s):  
Executive Compensation ◽  
Empirical Evidence ◽  
Risk Taking ◽  
Principal Agent ◽  
Optimal Contract ◽  
Efficient Mechanism ◽  
Opposite Conclusion

There is controversy about the relative merits of stock and options in executive compensation. Some observers contend that stock is a more efficient mechanism, while others reach the opposite conclusion. We focus on the manager's risk-taking incentives and derive an optimal compensation contract by using the concept of a comparable benchmark and imposing a volatility constraint in a principal-agent framework. We demonstrate a joint role for both stock and options in the optimal contract. We show that firms with higher volatility should use more options in compensating their executives and provide empirical evidence supporting this testable implication.

Aging Population, Retirement, and Risk Taking: Reply

2020 ◽  
Vol 66 (6) ◽  
pp. 2796-2799
Author(s):  
Haim Levy
Keyword(s):  
Empirical Evidence ◽  
Risk Taking ◽  
Geometric Mean ◽  
Aging Population ◽  
The Other ◽  
Investment Horizon ◽  
Technical Error ◽  
Long Run ◽  
Original Theorem

In theorem 1 given in my paper, “Aging Population, Retirement, and Risk Taking” [Levy H (2016a) Aging population, retirement, and risk taking. Management Sci. 62(5):1415–1430.], there is indeed a technical error. Yet, adding one condition to the theorem (which can be added in two alternate ways) is sufficient to ensure the dominance of stocks over bonds in the very long run. For the commonly employed preferences, the empirical evidence conforms with the claim given in my original theorem 1, asserting that the portfolio with the higher geometric mean (stocks) dominates the other portfolio under consideration (bonds) as the investment horizon increases indefinitely. Thus, as advocated in my paper, stocks dominate bonds for investors with typical preferences who save for retirement. This paper was accepted by Karl Deither, finance.

Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry

2011 ◽  
Vol 46 (4) ◽  
pp. 1073-1106 ◽  
Author(s):  
Yong Chen
Keyword(s):  
Risk Reduction ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Market Risk ◽  
Risk Shifting ◽  
Large Sample ◽  
Event Risk ◽  
Market State ◽  
Fund Industry

AbstractThis paper examines the use of derivatives and its relation with risk taking in the hedge fund industry. In a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks (e.g., market risk, downside risk, and event risk), such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.

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