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https://ssrn.com/abstract=225298
 
 

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Risk Taking by Mutual Funds as a Response to Incentives


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

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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Date posted: July 12, 2000  

Suggested Citation

Chevalier, Judith A. and Ellison, Glenn, Risk Taking by Mutual Funds as a Response to Incentives (August 1995). NBER Working Paper No. w5234. Available at SSRN: https://ssrn.com/abstract=225298

Contact Information

Judith A. Chevalier (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Glenn David Ellison
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
Room E52-380B
Cambridge, MA 02142
United States
617-253-8702 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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