Asset Choice Regulation in Mutual Funds

55 Pages Posted: 22 Jul 2004

See all articles by Sabrina Buti

Sabrina Buti

Université Paris Dauphine - Department of Finance

Date Written: March 15, 2004

Abstract

Should the type of assets held by mutual funds be regulated? We investigate this issue in a costly state verification model, where the regulator determines the type of assets in which mutual funds can invest, fund managers select assets under this constraint, and investors can, at a cost, control the performance of the manager. The optimal level of risk for the portfolio reflects the following trade-off: On the one hand risky assets magnify the manager's incentives to lie, on the other hand they enhance the incentives of the investor to monitor performance. We show that regulation helps protect investors by restricting the discretion of the fund manager.

Keywords: mutual funds, portfolio choice, regulation

JEL Classification: G11, G23, G28, D82

Suggested Citation

Buti, Sabrina, Asset Choice Regulation in Mutual Funds (March 15, 2004). Available at SSRN: https://ssrn.com/abstract=567051 or http://dx.doi.org/10.2139/ssrn.567051

Sabrina Buti (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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