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How Are Derivatives Used? Evidence from the Mutual Fund Industry

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Author Info
Jennifer Lynch Koski (School of Business Administration, University of Washington)
Jeffrey Pontiff (School of Business Administration, University of Washington)

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Abstract

We investigate investment managers' use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives. In contrast to public perception, derivative users have risk exposure and return performance that are similar to nonusers. We also analyze changes in fund risk in response to prior fund performance. Changes in risk are substantially less severe for funds using derivatives, consistent with the explanation that managers use derivatives to reduce the impact of performance on risk. We provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk. Copyright The American Finance Association 1999.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 54 (1999)
Issue (Month): 2 (04)
Pages: 791-816
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Handle: RePEc:bla:jfinan:v:54:y:1999:i:2:p:791-816

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349 National Bureau of Economic Research, Inc. [Downloadable!]
  3. Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," Center for Financial Institutions Working Papers 95-07, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Gary Gorton & Richard Rosen, 1995. "Banks and derivatives," Working Papers 95-12, Federal Reserve Bank of Philadelphia.
  5. Merton, Robert C., 1995. "Financial innovation and the management and regulation of financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 461-481, June. [Downloadable!] (restricted)
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  6. Gary Gorton & Richard Rosen, . "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 06-95, Wharton School Rodney L. White Center for Financial Research.
  7. S. James Press, 1967. "A Compound Events Model for Security Prices," Journal of Business, University of Chicago Press, vol. 40, pages 317. [Downloadable!]
  8. Merton, Robert C & Scholes, Myron S & Gladstein, Mathew L, 1978. "The Returns and Risk of Alternative Call Option Portfolio Investment Strategies," Journal of Business, University of Chicago Press, vol. 51(2), pages 183-242, April. [Downloadable!] (restricted)
  9. Bookstaber, Richard & Clarke, Roger, 1984. "Option Portfolio Strategies: Measurement and Evaluation," Journal of Business, University of Chicago Press, vol. 57(4), pages 469-92, October. [Downloadable!] (restricted)
  10. Gary Gorton & Richard Rosen, . "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 6-95, Wharton School Rodney L. White Center for Financial Research.
  11. Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Working Papers 5100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law & Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
  13. Pontiff, Jeffrey, 1995. "Closed-end fund premia and returns Implications for financial market equilibrium," Journal of Financial Economics, Elsevier, vol. 37(3), pages 341-370, March. [Downloadable!] (restricted)
  14. Mark Grinblatt & Sheridan Titman, . "Adverse Risk Incentives and the Design of Performance-Based Contracts," Rodney L. White Center for Financial Research Working Papers 21-88, Wharton School Rodney L. White Center for Financial Research.
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