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Endogenous volatility and strategic disclosure in mutual funds

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  • Fan, Zhongjie

Abstract

We develop an information design model where mutual fund managers jointly choose portfolio volatility and disclosure policy to maximize fee revenue from risk-averse investors. We demonstrate that persuasion fundamentally drives risk-taking. When high risk-free rates render funds unappealing, managers endogenously inflate asset volatility to manufacture the information asymmetry required to persuade investors. Optimal volatility strictly increases with the risk-free rate and decreases with investor risk aversion. Our framework highlights how high interest rates inadvertently incentivize excessive risk-taking in asset management.

Suggested Citation

  • Fan, Zhongjie, 2026. "Endogenous volatility and strategic disclosure in mutual funds," Economics Letters, Elsevier, vol. 266(C).
    • Handle: RePEc:eee:ecolet:v:266:y:2026:i:c:s016517652600248x
    DOI: 10.1016/j.econlet.2026.113054
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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