Hurdle Rate, Zero Lower Bound and Investors’ Active Risk Taking
55 Pages Posted: 4 Jun 2018
Date Written: June 4, 2018
We propose that the hurdle rate is helpful to understand the fund-flow decisions made by investors of fixed income mutual funds. Hurdle rates are inelastic and heterogeneous. Investors with positive hurdle rates may switch between two motivations: Take risk actively or follow relative fund performance. The regime of zero federal fund rate could motivate investors with positive hurdle rates to switch from following relative fund performance to active risk-taking. Our empirical results support this prediction. Since 2009, significantly larger inflows into riskier fixed income mutual funds are documented. During the taper tantrum period, although the evidence of significant outflows from fixed income mutual funds following the safe benchmark is consistent with anecdotal evidence, we document significant inflows into fixed income mutual funds following the risky benchmark.
Keywords: hurdle rate, zero lower bound, risk-taking
JEL Classification: G20, G23, G28
Suggested Citation: Suggested Citation