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Downside Risk Timing by Mutual Funds

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  • Andriy Bodnaruk
  • Bekhan Chokaev
  • Andrei Simonov

Abstract

We study whether mutual funds systematically manage the downside risk of their portfolios in ways that improve their performance. We find that actively managed mutual funds on average possess positive downside-risk-timing ability. Managers adjust funds’ downside risk exposure in response to macroeconomic information; however, downside-risk-timing skills remain strong even after controlling for macro variables. Funds more skilled in timing downside risk outperform those that are not by 14.3 bp per month (or 1.73% annualized) unconditionally and by 39.9 bp per month (or 4.89% annualized) during recessions; they also attract larger flows. Received September 11, 2016; editorial decision Januaruy 08, 2018 by Editor Wayne Ferson.

Suggested Citation

  • Andriy Bodnaruk & Bekhan Chokaev & Andrei Simonov, 2019. "Downside Risk Timing by Mutual Funds," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 9(1), pages 171-196.
    • Handle: RePEc:oup:rasset:v:9:y:2019:i:1:p:171-196.
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    File URL: http://hdl.handle.net/10.1093/rapstu/ray003
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    Cited by:

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    2. Farrukh Naveed & Muhammad Ishfaq & Zahid Maqbool, 2021. "The downside risk of mutual funds: Does the quality of corporate governance matter? Empirical evidence from Pakistan," Journal of Asset Management, Palgrave Macmillan, vol. 22(5), pages 376-388, September.
    3. Sara Ali & Ihsan Badshah & Riza Demirer & Prasad Hegde, 2023. "Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand," International Review of Finance, International Review of Finance Ltd., vol. 23(3), pages 666-679, September.
    4. Manuel Ammann & Sebastian Fischer & Florian Weigert, 2018. "Risk Factor Exposure Variation and Mutual Fund Performance," Working Papers on Finance 1817, University of St. Gallen, School of Finance, revised Nov 2018.
    5. Tim Jenkinson & Stefan Morkoetter & Thomas Wetzer, 2018. "Buy Low, Sell High? Do Private Equity Fund Managers Have Market Abilities?," Working Papers on Finance 1813, University of St. Gallen, School of Finance.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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