Mutual Fund Risk Shifting and Risk Anomalies

78 Pages Posted: 28 Sep 2021 Last revised: 25 Apr 2022

See all articles by Xiao Han

Xiao Han

City University London - Bayes Business School

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Hongxun Ruan

Guanghua School of Management, Peking University

Date Written: March 1, 2021

Abstract

Risk-shifting by underperforming funds increases their demand for risky stocks. We show that well-known risk anomalies such as the apparent overvaluation of stocks with high beta, idiosyncratic volatility, and skewness are concentrated among stocks held by laggard funds. Exploiting the Morningstar rating methodology change in 2002 we show that the beta anomaly is significant only when beta is measured against the S&P 500 index for the pre-2002 period and against the relevant category index for the post-2002 period. Counterfactual estimates from an asset demand system imply that removing demand by the laggard funds essentially eliminates the beta anomaly.

Keywords: Beta Anomaly, Morningstar Ratings, Mutual Funds, Risk Shifting, Idiosyncratic Volatility, Skewness, Demand System

Suggested Citation

Han, Xiao and Roussanov, Nikolai L. and Ruan, Hongxun, Mutual Fund Risk Shifting and Risk Anomalies (March 1, 2021). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3931449 or http://dx.doi.org/10.2139/ssrn.3931449

Xiao Han

City University London - Bayes Business School ( email )

United Kingdom

Nikolai L. Roussanov (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hongxun Ruan

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

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