Strategic Choice of Risk: Evidence from Mutual Fund Families

This study examines family-level risk taking behavior from the perspective of the strategic choice of risk. We examine whether family-level risk taking tendency is affected by a fund family’s flow tournament position in the mutual fund industry. We use family-level excess fund flow, which is defined...

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Bibliographic Details
Published in:Journal of financial services research 2017-02, Vol.51 (1), p.125-163
Main Authors: Chan, Chia-Ying, Lai, Christine W., Lee, Liang-Chung
Format: Article
Language:English
Subjects:
Asset management
Calendars
Economics and Finance
Equity
Equity funds
Finance
Financial Services
Investment policy
Macroeconomics/Monetary Economics//Financial Economics
Mutual funds
Portfolio management
Product differentiation
Risk exposure
Scandals
Standard deviation
Studies
Tournaments & championships
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Summary:This study examines family-level risk taking behavior from the perspective of the strategic choice of risk. We examine whether family-level risk taking tendency is affected by a fund family’s flow tournament position in the mutual fund industry. We use family-level excess fund flow, which is defined by the gap between the actual net flows and expected net flows of a fund family, to proxy for its interim fund-flow tournament position. A fund family is an interim winner (loser) if it experiences better (worse) than expected net flows. Two measures are used to proxy for risk taking strategy: (1) Active Share; and (2) the Standard Deviation of Fund Holdings at Family Level. Overall, we conclude that fund families classified as interim losers and top interim winners in a net flow tournament position exhibit risk taking propensities. Bottom dwellers increase risk for survival, whereas leaders increase risk to retain their leadership.
ISSN:0920-8550
1573-0735
DOI:10.1007/s10693-016-0242-5