The Impact of Prior Performance on the Risk-Taking of Mutual Fund Managers

29 Pages Posted: 21 Nov 2007  

Manuel Ammann

University of St. Gallen - School of Finance

Michael Verhofen

University of St. Gallen - Swiss Institute of Banking and Finance; Allianz Global Investors

Date Written: November 20, 2007

Abstract

We analyze the impact of prior performance on the risk-taking behavior of mutual fund managers. We contribute to the existing literature by using different measures of risks, a larger data set, and an econometric approach capturing non-linear effects and assigning exact probabilities to the mutual fund managers' adjustment of behavior. We find that prior performance in the first half of the year has, in general, a positive impact on the choice of the risk level in the second half of the year. Successful fund managers increase the volatility, the beta, and assign a higher proportion of their portfolio to value stocks, small firms, and momentum stocks in comparison to unsuccessful fund managers. Unsuccessful fund manager increase, on average, only the tracking error.

Keywords: mutual funds, risk taking

JEL Classification: G21

Suggested Citation

Ammann, Manuel and Verhofen, Michael, The Impact of Prior Performance on the Risk-Taking of Mutual Fund Managers (November 20, 2007). Available at SSRN: https://ssrn.com/abstract=1031463 or http://dx.doi.org/10.2139/ssrn.1031463

Manuel Ammann

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Michael Verhofen (Contact Author)

Allianz Global Investors ( email )

Frankfurt
Germany

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

HOME PAGE: http://www.verhofen.com

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