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Risk Shifting and Mutual Fund Performance

  • Jennifer Huang
  • Clemens Sialm
  • Hanjiang Zhang

Mutual funds change their risk levels significantly over time. This paper investigates the performance consequences of risk shifting, as well as the economic motivations and the mechanisms of risk shifting. Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time. In addition, funds that expect higher benefits from risk shifting are more likely to increase risk and perform particularly poorly after increasing risk. Our results are consistent with the notion that agency problems, rather than the ability to take advantage of changing investment opportunities, are the likely motivation behind risk shifting behavior.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14903.

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Date of creation: Apr 2009
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Publication status: published as Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
Handle: RePEc:nbr:nberwo:14903
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