Zero Lower Bound and Investors’ Risk Taking on Fixed Income Mutual Funds

52 Pages Posted: 24 Jan 2018

See all articles by Woon Sau Leung

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh

Zhongyan Zhu

Monash University

Date Written: January 16, 2018

Abstract

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

Leung, Woon Sau and Zhu, Zhongyan, Zero Lower Bound and Investors’ Risk Taking on Fixed Income Mutual Funds (January 16, 2018). Available at SSRN: https://ssrn.com/abstract=3103496 or http://dx.doi.org/10.2139/ssrn.3103496

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

Zhongyan Zhu (Contact Author)

Monash University ( email )

Melbourne
Australia

HOME PAGE: http://sites.google.com/site/zhougyanzhu/

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