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Risk Taking by Mutual Funds as a Response to Incentives

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  • Chevalier, Judith
  • Ellison, Glenn

Abstract

This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk-adjusted fund returns, the fund company has an incentive to increase the inflow of investments. The authors estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-92 period. The shape creates incentives for fund managers to alter the riskiness of their portfolios. Examining portfolio holdings, the authors find that risk levels are changed toward the end of the year in a manner consistent with these incentives. Copyright 1997 by the University of Chicago.

Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jpolec:v:105:y:1997:i:6:p:1167-1200
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    References listed on IDEAS

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    1. Grinblatt, Mark & Titman, Sheridan, 1993. "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns," The Journal of Business, University of Chicago Press, vol. 66(1), pages 47-68, January.
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    5. Grinblatt, Mark & Titman, Sheridan D, 1989. "Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings," The Journal of Business, University of Chicago Press, vol. 62(3), pages 393-416, July.
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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