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On the empirical evidence of mutual fund strategic risk taking

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Author Info
Goriaev, A.P.
Nijman, T.E.
Werker, B. (Tilburg University, Center for Economic Research)

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Abstract

We reexamine empirical evidence on strategic risk-taking behavior by mutual fund managers. Several studies suggest that fund performance in the first semester of a year influences risk-taking in the second semester. However, we show that previous empirical studies implicitly assume that idiosyncratic fund returns (in a factor model) are uncorrelated across funds. We present generalized methodologies (based on both contingency tables and regression analysis) that accommodate the case of a general error structure. We show that the correlation between idiosyncratic fund returns is essential to the analysis and, when it is taken into account, the empirical evidence of strategic risk taking by fund managers disappears.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 9.

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Date of creation: 2001
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Handle: RePEc:dgr:kubcen:20019

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. Khorana, Ajay, 1996. "Top management turnover An empirical investigation of mutual fund managers," Journal of Financial Economics, Elsevier, vol. 40(3), pages 403-427, March. [Downloadable!] (restricted)
  2. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  3. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March. [Downloadable!] (restricted)
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