Tail risk and the cross-section of Thai mutual fund returns: evidence from non-tax saving and tax-saving funds

Abstract

With the primary objectives of quantifying the compensation for extreme downside exposure and evaluating the systemic impact of regulatory capital lock-ups, this study comprehensively examines the pricing and structural determinants of tail risk within the Thai mutual fund industry. By utilizing the cross-sectional Hill estimator and Fama-MacBeth regressions, the research adjudicates between competing theoretical frameworks regarding portfolio liquidity and managerial risk-taking. The findings confirm the existence of a tail risk premium, high tail risk funds outperform low-risk funds by 1.92% per annum, though this compensation is less than half the size of what is observed in the U.S. market. Furthermore, this premium is entirely relative, as Thai funds generally underperform broader market benchmarks regardless of their risk level. The results also identify investor cash flows and active management deviations as the primary drivers of a fund's exposure to extreme risk. Crucially, by testing the impact of mandatory holding periods in tax-saving funds, the study reveals that capital lock-ups significantly reduce tail risk exposure. This strongly supports the Stability Hypothesis, demonstrating that locking in capital protects managers from fire-sale redemption pressure, and firmly rejects the notion that such safety nets encourage reckless risk-taking.