Synthetic Leverage and Fund Risk-Taking

58 Pages Posted: 24 Mar 2021 Last revised: 22 Sep 2022

See all articles by Daniel Fricke

Daniel Fricke

Deutsche Bundesbank; University College London; London School of Economics & Political Science (LSE) - Systemic Risk Centre

Multiple version iconThere are 3 versions of this paper

Date Written: September 22, 2022

Abstract

Mutual fund risk-taking via active portfolio rebalancing varies both in the cross-section and over time. In this paper, I show that the same is true for funds' risk-taking that is not due to portfolio rebalancing (synthetic leverage). For this purpose, I propose a novel measure of synthetic leverage that does not require confidential regulatory data. In the empirical application for German equity funds, I show that funds' overall risk-taking is strongly driven by synthetic leverage. Moreover, I find that synthetically leveraged funds underperform and are more fragile.

Keywords: leverage, risk-taking, derivatives, securities lending, mutual funds

JEL Classification: E44, G11, G23

Suggested Citation

Fricke, Daniel, Synthetic Leverage and Fund Risk-Taking (September 22, 2022). Available at SSRN: https://ssrn.com/abstract=3810593 or http://dx.doi.org/10.2139/ssrn.3810593

Daniel Fricke (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre

Houghton St, London WC2A 2AE, United Kingdom
London

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