Risk Taking by Mutual Funds as a Response to Incentives / Judith A. Chevalier, Glenn D. Ellison.

Format:

Book

Author/Creator:

Chevalier, Judith A.

Contributor:

National Bureau of Economic Research.

Ellison, Glenn D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5234.

NBER working paper series no. w5234

Language:

English

Subjects (All):

Mutual funds--Economic aspects.

Mutual funds.

Risk--Econometric models.

Risk.

Political entrepreneurship.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1995.

Cambridge, Massachusetts : National Bureau of Economic Research, 1995.

Summary:

This paper examines the agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgement to maximize risk-adjusted fund returns. A fund company, however, in its desire to maximize its value as a concern has an incentive to take actions which increase the inflow of investment. We use a semiparametric model to estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-1992 period. The shape of the flow-performance relationship creates incentives for fund managers to increase or decrease the riskiness of the fund which are dependent on the fund's year-to-date return. Using a new dataset of mutual fund portfolios which includes equity portfolio holdings for September and December of the same year, we show that mutual funds do alter their portfolio riskiness between September and December in a manner consistent with these risk incentives.

Notes:

Print version record

August 1995.