Zero Lower Bound and Investors’ Risk Taking on Fixed Income Mutual Funds
52 Pages Posted: 24 Jan 2018
Date Written: January 16, 2018
We document that mutual fund investors take risk independent of fund managers. The independent risk taking is manifested through channeling more fund flows to certain fixed income mutual funds that invest more on risky assets. Further, this kind of risk-taking by investors is not observed in years where interest rates are normal or high, but becomes prominent only during the zero lower bound. One potential bright side of such risk-taking behaviors is that investors do know the risk they are about to take ex-ante, and are likely to be more lenient on performance and put less redemption pressure on mutual fund managers when bond prices drop, ex-post. Empirical evidence supports this hypothesis. Fund inflows to mutual funds following risky benchmarks are higher than outflows from mutual funds following safe benchmarks from 2013 to 2015.
Keywords: Zero lower bound, risk-taking, mutual fund, investors, and fund flow
JEL Classification: G20, G23, G28
Suggested Citation: Suggested Citation