Synthetic Leverage and Fund Risk-Taking

63 Pages Posted: 30 Mar 2021

See all articles by Daniel Fricke

Daniel Fricke

Deutsche Bundesbank; University College London; London School of Economics & Political Science (LSE) - Systemic Risk Centre

Multiple version iconThere are 3 versions of this paper

Date Written: 2021

Abstract

Mutual fund risk-taking via active portfolio rebalancing varies both in the cross- section and over time. In this paper, I show that the same is true for funds' off- balance sheet risk-taking, even after controlling for on-balance sheet activities. For this purpose, I propose a novel measure of synthetic leverage, which can be estimated based on publicly available information. In the empirical application, I show that German equity funds have increased their risk-taking via synthetic leverage from mid-2015 up until early 2019. In the cross-section, I find that synthetically leveraged funds tend to underperform and display higher levels of fragility.

JEL Classification: E44, G11, G23

Suggested Citation

Fricke, Daniel, Synthetic Leverage and Fund Risk-Taking (2021). Deutsche Bundesbank Discussion Paper No. 09/2021, Available at SSRN: https://ssrn.com/abstract=3813662

Daniel Fricke (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre

Houghton St, London WC2A 2AE, United Kingdom
London

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