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Aggregate Risk and Efficiency of Mutual Funds

Author

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  • Simas Kucinskas

    (VU University Amsterdam, the Netherlands)

Abstract

I analyze welfare properties of mutual funds in the Diamond-Dybvig model with two sources of aggregate risk: undiversifiable interest rate risk and shocks to aggregate liquidity demand. Mutual funds are inefficient when the economy faces undiversifiable interest rate risk. However, if only aggregate liquidity demand is stochastic, mutual funds can implement the social optimum even when liquidity demand is not directly observed.

Suggested Citation

  • Simas Kucinskas, 2015. "Aggregate Risk and Efficiency of Mutual Funds," Tinbergen Institute Discussion Papers 15-113/VI, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20150113
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    File URL: https://papers.tinbergen.nl/15113.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Mutual funds; equity contracts; liquidity creation; liquidity insurance; aggregate risk;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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