Economic policy uncertainty and mutual fund risk shifting

Abstract

This study examines the effect of economic policy uncertainty (EPU) on mutual fund risk shifting. Using Chinese mutual fund data from 2006 to 2020, we find that managers increase risk-shifting activities when uncertainty rises. A one-standard-deviation increase in EPU is associated with a 0.27- to 0.55-standard-deviation increase in risk shifting. Managers’ tendency to shift risk stems from poor performance during high EPU periods. Managers increase the portfolio risk by switching from cash holdings to equities, engaging in sector rotation, and increasing bubble stock holdings.