Mutual Fund Risk Shifting and Risk Anomalies
78 Pages Posted: 28 Sep 2021 Last revised: 25 Apr 2022
Date Written: March 1, 2021
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
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