Working Paper: NBER ID: w14903
Authors: Jennifer Huang; Clemens Sialm; Hanjiang Zhang
Abstract: 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.
Keywords: Mutual Funds; Risk Shifting; Performance; Agency Problems
JEL Codes: G11; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funds that increase their risk levels (G23) | perform worse than those that maintain stable risk levels (G41) |
| Higher expected benefits from risk shifting (D81) | more likely to shift risk and subsequently perform poorly (G41) |
| Increases in idiosyncratic risk exposure (G19) | poor performance of risk shifters (D81) |
| Changes in systematic risk (G40) | minimal impact on poor performance of risk shifters (G40) |
| Low turnover funds (G23) | worse performance despite lower trading activity (G19) |
| Risk shifting behavior (D16) | indicative of inferior ability or agency problems (D82) |