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Time-Varying Incentives in the Mutual Fund Industry

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Author Info
Olivier, Jacques
Tay, Anthony

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Abstract

This paper re-examines the incentives of mutual fund managers arising from investor flows. We provide evidence that the convexity of the flow-performance relationship varies with economic activity. We show that the effect is economically large and is not driven by abnormal years. We test two possible channels through which this pattern may arise. We investigate implications of the time-varying convexity for the incentives of managers to alter strategically the risk of their portfolios. We provide evidence that poor mid-year performers increase the risk of the portfolio only when economic activity is strong. Finally, we briefly discuss some methodological implications.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6893.

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Date of creation: Jun 2008
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Handle: RePEc:cpr:ceprdp:6893

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Related research
Keywords: Business Cycle; Convexity; Flow-performance Relationship; Incentives; Mutual Funds;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

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References listed on IDEAS
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  6. Olivier Scaillet & Laurent Barras & Russell R. Wermers, 2005. "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas," Working Papers CEB 05-014.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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  20. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October. [Downloadable!] (restricted)
  21. Robert Kosowski & Allan Timmermann & Russ Wermers & Hal White, 2006. "Can Mutual Fund "Stars" Really Pick Stocks? New Evidence from a Bootstrap Analysis," Journal of Finance, American Finance Association, vol. 61(6), pages 2551-2595, December. [Downloadable!] (restricted)
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  30. Jennifer Huang & Kelsey D. Wei & Hong Yan, 2007. "Participation Costs and the Sensitivity of Fund Flows to Past Performance," Journal of Finance, American Finance Association, vol. 62(3), pages 1273-1311, 06. [Downloadable!] (restricted)
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