A paper titled “Iso-Risk: An Analysis of Risk-Taking in Fixed Income Markets” by Associate Professor of Finance Ben Van Vliet and Apostolos Xanthopoulos (Ph.D., Management Science – Finance) has been accepted for publication by Applied Economics.
In this article, the authors test the hypothesis that portfolio managers trade off variance and kurtosis in asset returns using fixed income mutual fund data. It appears that managers tend to systematically “swing for the fences” when the probability of out-performance is low. This resolves previous enigmas of preference reversals and adheres to both Prospect Theory and tournament effects. The methodology developed enables reconciliation of active return metrics and managers’ total return behavior.