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Synthetic Leverage and Fund Risk-Taking

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  • Fricke, Daniel

Abstract

Mutual fund risk-taking via active portfolio rebalancing varies both in the cross-section and over time. In this paper, I show that the same is true for funds’ off-balance sheet risk-taking, even after controlling for on-balance sheet activities. For this purpose, I propose a novel measure of synthetic leverage, which can be estimated based on publicly available information. In the empirical application, I show that German equity funds have increased their risk-taking via synthetic leverage from mid-2015 up until early 2019. In the cross-section, I find that synthetically leveraged funds tend to underperform and display higher levels of fragility. JEL Classification: G11, G23, E44

Suggested Citation

  • Fricke, Daniel, 2021. "Synthetic Leverage and Fund Risk-Taking," ESRB Working Paper Series 126, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2021126
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    Cited by:

    1. Molestina Vivar, Luis & Wedow, Michael & Weistroffer, Christian, 2023. "Burned by leverage? Flows and fragility in bond mutual funds," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 354-380.
    2. Jukonis, Audrius, 2022. "Evaluating market risk from leveraged derivative exposures," Working Paper Series 2722, European Central Bank.
    3. Sirio Aramonte & Andreas Schrimpf & Hyun Song Shin, 2023. "Non-bank financial intermediaries and financial stability," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 7, pages 147-170, Edward Elgar Publishing.

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    More about this item

    Keywords

    derivatives; leverage; mutual funds; risk-taking; securities lending;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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