How are Derivatives Used? Evidence from the Mutual Fund Industry

WFIC 96-27

Posted: 6 May 1998

See all articles by Jennifer L. Koski

Jennifer L. Koski

University of Washington - Michael G. Foster School of Business

Jeffrey Pontiff

Boston College - Department of Finance

Date Written: January 1996

Abstract

Approximately 20% of the 675 equity mutual funds analyzed in this paper invest in derivatives. We compare the return distributions of equity mutual funds that invest in derivatives to those that do not. We also analyze the use of derivatives to affect intertemporal changes in fund risk. Equity mutual funds that invest in derivatives have similar risk and similar net return performance to those that do not. Change in fund risk is negatively related to past performance, but derivatives allow funds to dampen these changes. We interpret these results as consistent with the hypothesis that managers are slow to respond to unexpected cash flows, and inconsistent with gaming of incentive compensation systems.

JEL Classification: G13, G23

Suggested Citation

Koski, Jennifer Lynch and Pontiff, Jeffrey, How are Derivatives Used? Evidence from the Mutual Fund Industry (January 1996 ). WFIC 96-27. Available at SSRN: https://ssrn.com/abstract=7610

Jennifer Lynch Koski (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-7975 (Phone)
206-685-9392 (Fax)

Jeffrey Pontiff

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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