Recent empirical studies of mutual fund competition examine the relation between a fund s compensation, and the fund manager s portfolio choice for compensation rules that can be either a concave, linear, or convex function of the fund s volatility as its relative performance declines. However, declining performance does not necessarily lead the manager to raise the volatility of the fund s return. The paper presents nonparametric and parametric tests of the relation between mutual fund performance and risk taking for more than 6,000 equity mutual funds over the 1962 to 2006 period. There is a tendency for mutual funds to increase the standard deviation of tracking errors, but not the standard deviation of returns, as their performance declines. This risk-shifting behavior appears more common for funds whose managers have longer tenures.
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Volume (Year): 44 (2009) Issue (Month): 04 (August) Pages: 745-775 Download reference. The following formats are available: HTML
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