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Risk Taking by Mutual Funds as a Response to Incentives
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JUDITH A. CHEVALIER
Yale School of Management; National Bureau of Economic Research (NBER)
GLENN ELLISON
Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)
August 1995
NBER Working Paper No. W5234
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Abstract:
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.
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Working Paper Series
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Suggested Citation
Chevalier, Judith A. and Ellison, Glenn David, "Risk Taking by Mutual Funds as a Response to Incentives"
(August 1995).
NBER Working Paper No. W5234. Available at SSRN: http://ssrn.com/abstract=225298
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Contact Information for
JUDITH
A.
CHEVALIER
(Contact Author)
Email address for JUDITH
A.
CHEVALIER
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven
, CT
06520-8200
United States
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(No e-mail address available for JUDITH
A.
CHEVALIER
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge
, MA
02138
United States
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Contact Information for
GLENN
ELLISON
Email address for GLENN
ELLISON
Massachusetts Institute of Technology (MIT) - Department of Economics
50 Memorial Drive
Room E52-380B
Cambridge
, MA
02142
United States
617-253-8702 (Phone)
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(No e-mail address available for GLENN
ELLISON
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge
, MA
02138
United States
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