Do Zombie Funds Gamble for Resurrection? Evidence from the US Corporate Bond Market

42 Pages Posted: 7 Nov 2017

See all articles by Jannic Cutura

Jannic Cutura

Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students

Gianpaolo Parise

EDHEC

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: November 6, 2017

Abstract

We explore the risk-taking behavior of bond mutual funds. We find that funds facing a high risk of runs (zombie funds) shift portfolio allocation towards high-risk, high-reward securities. By contrast, outperforming funds (star funds) reduce risk-taking. This strategic behavior is consistent with the evidence on the concavity of the flow-performance relation: zombie funds have an incentive to gamble for resurrection, increasing returns to avoid runs, whereas star funds have little or no incentive for taking additional risk. We provide evidence that these strategies affect the volatility and skewness of realized fund performance, and increase the cost of distress for ultimate investors when zombie funds shut down.

Keywords: Bond Mutual Funds, Risk-Taking, Gambling for Resurrection, Moral Hazard, Tournaments, Flow-Performance Sensitivity

JEL Classification: G11, G23, G32, E43

Suggested Citation

Cutura, Jannic and Parise, Gianpaolo and Schrimpf, Andreas, Do Zombie Funds Gamble for Resurrection? Evidence from the US Corporate Bond Market (November 6, 2017). Available at SSRN: https://ssrn.com/abstract=3065886 or http://dx.doi.org/10.2139/ssrn.3065886

Jannic Cutura

Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students ( email )

Grüneburgplatz 1
Frankfurt
Germany

Gianpaolo Parise (Contact Author)

EDHEC ( email )

393 Promenade des Anglais
Nice, 06200
France

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
84
Abstract Views
441
rank
296,521
PlumX Metrics