Toward a Macroprudential Regulatory Framework for Mutual Funds

This paper highlights the procyclical and unstable behaviour of mutual fund returns. It proposes a novel factor model that allows for regime changes associated with macroeconomic variables. Estimated on a panel covering 825 US equity mutual funds over a period of 30 years, it appears that the yield curve, the dividend yield and the industrial production coincide with regimes switches in the Fama-French factors. Furthermore, the estimated regimes perfectly match financial crises and economic downturns, thus confirming the procyclical behaviour of mutual funds' returns. These findings, coupled with the emerging systemic role of mutual funds, promote the consideration for a specific macroprudential regulatory framework.