Incentive Fees and Mutual Fund Volatility Timing

46 Pages Posted: 13 Oct 2005 Last revised: 5 Aug 2008

See all articles by Erasmo Giambona

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Joseph H. Golec

University of Connecticut - Department of Finance

Date Written: 2007

Abstract

This paper shows that compensation incentives partly drive fund managers' market volatility timing strategies. Larger management fees are associated with less counter-cyclical or more pro-cyclical volatility timing. Fund investment objectives and styles also partly determine volatility timing. Funds with more aggressive styles time volatility more counter-cyclically. Thus, managers may try to outperform the general market by adopting aggressive styles, while dynamically hedging portfolio volatility using counter-cyclical volatility timing. We also find that fund managers systematically change their portfolio betas in response to aggregate equity fund cash flows. The average effects of volatility timing and fund flow timing on fund performance are mostly positive for funds that increase their betas when conditional volatility and fund flows increase (i.e., pro-cyclical timers).

Keywords: mutual fund, volatility timing, incentive fee

JEL Classification: G11, G23

Suggested Citation

Giambona, Erasmo and Golec, Joseph, Incentive Fees and Mutual Fund Volatility Timing (2007). Available at SSRN: https://ssrn.com/abstract=820264 or http://dx.doi.org/10.2139/ssrn.820264

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 120-D
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

Joseph Golec (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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