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Mutual fund tournaments: State-dependent risk taking with transaction costs

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  • Zhao, Lu
  • Wang, Liang
  • Luo, Ronghua

Abstract

We investigate the state-varying risk taking behavior of actively managed mutual funds by considering their transaction costs in trading securities. Our tournament model equilibrium suggests that, while transaction costs are low, interim winner funds tend to hold more volatile portfolios than interim losers. However, while transaction costs are high, the interim losers may take more risk than interim winners, and such behavior is more significant in the negative risk premium state for funds. We provide robust empirical evidence of state-varying risk-taking in both U.S. and China from 2005 to 2019. The U.S. mutual fund tournaments are less influenced given the bid-ask spreads on the stock market are 20 bps lower than that in China.

Suggested Citation

  • Zhao, Lu & Wang, Liang & Luo, Ronghua, 2024. "Mutual fund tournaments: State-dependent risk taking with transaction costs," Emerging Markets Review, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:ememar:v:59:y:2024:i:c:s1566014124000141
    DOI: 10.1016/j.ememar.2024.101119
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    More about this item

    Keywords

    Compensation incentive; Interim performance; Risk taking; Transaction cost;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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