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Risk Shifting and Mutual Fund Performance

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  • Jennifer Huang
  • Clemens Sialm
  • Hanjiang Zhang

Abstract

Mutual funds change their risk levels significantly over time. Risk shifting might be caused by ill-motivated trades of unskilled or agency-prone fund managers who trade to increase their personal compensation. Alternatively, risk shifting might occur when skilled fund managers trade to take advantage of their stock selection and timing abilities. This article investigates the performance consequences of risk shifting and sheds light on the mechanisms and the economic motivations behind risk-shifting behavior. Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time, suggesting that risk shifting either is an indication of inferior ability or is motivated by agency issues. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 24 (2011)
Issue (Month): 8 ()
Pages: 2575-2616

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Handle: RePEc:oup:rfinst:v:24:y:2011:i:8:p:2575-2616

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Cited by:
  1. Ferreira, Miguel A. & Keswani, Aneel & Miguel, Antonio F. & Ramos, Sofia B., 2012. "The flow-performance relationship around the world," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1759-1780.
  2. Laura Veldkamp, 2012. "Time-varying fund manager skill," 2012 Meeting Papers, Society for Economic Dynamics 68, Society for Economic Dynamics.
  3. Scalia, Antonio & Sahel, Benjamin, 2011. "Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management," Working Paper Series, European Central Bank 1377, European Central Bank.
  4. Cullen, Grant & Gasbarro, Dominic & Monroe, Gary S. & Zumwalt, J. Kenton, 2012. "Changes to mutual fund risk: Intentional or mean reverting?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 112-120.
  5. Agarwal, Vikas & Ma, Linlin, 2013. "Managerial multitasking in the mutual fund industry," CFR Working Papers 13-10, University of Cologne, Centre for Financial Research (CFR).
  6. Ling, Leng & Arias, J.J., 2013. "Mutual fund flows and window-dressing," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 53(4), pages 440-449.
  7. Clemens Sialm & T. Mandy Tham, 2011. "Spillover Effects in Mutual Fund Companies," NBER Working Papers 17292, National Bureau of Economic Research, Inc.
  8. Huij, Joop & Derwall, Jeroen, 2011. "Global equity fund performance, portfolio concentration, and the fundamental law of active management," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 155-165, January.
  9. Anthony Tay, 2008. "Time-Varying Incentives in the Mutual Fund Industry," Finance Working Papers 22484, East Asian Bureau of Economic Research.
  10. Peter Cziraki & Moqi Xu, 2014. "Ceo Job Security And Risk-Taking," FMG Discussion Papers, Financial Markets Group dp729, Financial Markets Group.
  11. Olivier, Jacques & Tay, Anthony, 2008. "Time-Varying Incentives in the Mutual Fund Industry," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6893, C.E.P.R. Discussion Papers.
  12. Gupta-Mukherjee, Swasti, 2013. "When active fund managers deviate from their peers: Implications for fund performance," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1286-1305.
  13. Agnesens, Julius, 2013. "A statistically robust decomposition of mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3867-3877.
  14. Marcin Kacperczyk & Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Rational Attention Allocation Over the Business Cycle," NBER Working Papers 15450, National Bureau of Economic Research, Inc.
  15. Solomon, David H. & Soltes, Eugene & Sosyura, Denis, 2014. "Winners in the spotlight: Media coverage of fund holdings as a driver of flows," Journal of Financial Economics, Elsevier, Elsevier, vol. 113(1), pages 53-72.
  16. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2008. "Employment risk, compensation incentives and managerial risk taking: Evidence from the mutual fund industry," CFR Working Papers 07-02, University of Cologne, Centre for Financial Research (CFR).

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