Fund Performance and Subsequent Risk: A Study of Mutual Fund Tournaments Using Holdings-Based Measures

Financial Markets and Portfolio Management (Forthcoming)

35 Pages Posted: 23 Aug 2009 Last revised: 18 Nov 2019

See all articles by Iwan Meier

Iwan Meier

HEC Montreal - Department of Finance

Aymen Karoui

York University

Date Written: November 15, 2009

Abstract

The tournament hypothesis of Brown et al. (1996) posits that managers of poorly performing funds actively increase portfolio risk in the second half of the year. At the same time, it is a well-established stylized fact that stock returns and the subsequent return standard deviation are negatively related. We propose a decomposition of fund return standard deviation for the second half of the year using holdings-based measures in order to distinguish between risk changes that result from holding the portfolio and those that are due to the trades of managers. To this end, we extend the return gap of Kacperczyk et al. (2008) to the return standard deviation dimension and define the volatility gap as the difference between fund return volatility and buy-and-hold portfolio volatility. Our empirical findings show that changes in the return volatilities of equity mutual funds are largely explained by shifts in buy-and-hold portfolio volatility. Thus, we find only weak evidence of tournament behavior among mutual funds.

Keywords: Mutual funds, tournament, risk shifting, holdings-based measure

JEL Classification: G11, G12, G14

Suggested Citation

Meier, Iwan and Karoui, Aymen, Fund Performance and Subsequent Risk: A Study of Mutual Fund Tournaments Using Holdings-Based Measures (November 15, 2009). Financial Markets and Portfolio Management (Forthcoming), Available at SSRN: https://ssrn.com/abstract=1459647

Iwan Meier (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7 H2J 2K9
Canada
(514) 340-3198 (Phone)

Aymen Karoui

York University ( email )

2275, avenue Bayview
Toronto, Ontario M4N 3M6
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
110
Abstract Views
1,356
rank
340,357
PlumX Metrics