Behavior Of Mutual Funds Research Articles

When in peril, retrench: Testing the portfolio channel of contagion

The impact of past gains and losses on international investors' risk aversion is an important factor in the propagation of financial shocks across countries. We first present a stylized model illustrating how changes in investors' risk aversion affect portfolio decisions and stock prices. We then examine empirically the behavior of international mutual funds. When funds' returns are below average, they reduce their exposure to countries in which they were overweight and vice versa. An index of “financial interdependence” that reflects the extent to which countries share overexposed funds helps explain the pattern of stock market comovement across countries and the pattern of contagion during crises.

Termination Risk, Multiple Managers and Mutual Fund Tournaments

This study analyzes the risk-taking behavior of mutual funds in response to their relative performance over the 1992 to 1999 period. Our results show that managers of funds whose performance is closer to that of the top performing funds have greater incentives to increase their portfolios' risk than managers at the top who exhibit a tendency to lock in their positions. The evidence suggests that termination risk imposes a constraint on the risk taking behavior of underperforming fund managers and the winner takes all phenomenon generates a strong incentive for the fund managers to be the top manager. We also analyze the difference in the risk taking behavior of funds managed by multiple managers and single managers. JEL Classification codes: G2 L2

How do family strategies affect fund performance? When performance-maximization is not the only game in town

This is a first attempt to study how the structure of the industry affects mutual fund behavior. I show that industry structure matters; the mutual fund families employ strategies that rely on the heterogeneity of the investors in terms of investment horizon by offering the possibility to switch across different funds belonging to the same family at no cost. I argue that this option acts as an externality for all the funds belonging to the same family, affecting the target level of performance the family wants to reach and the number of funds it wants to set up. By using the universe of the U.S. mutual fund industry, I empirically confirm this intuition. I find evidence of family driven heterogeneity among funds and show that families actively exploit it. I argue that the more families are able to differentiate themselves in terms of non-performance-related characteristics, the less they need to compete in terms of performance. Product differentiation—i.e., the dispersion in the “services” (fees, performance) that the competing funds offer—affects performance and fund proliferation. In particular, I show that the degree of product differentiation negatively affects performance and positively affects fund proliferation.

Risk-taking behavior in mutual fund tournaments

We develop a two-period model of a Brown et al. [J. Finance 51 (1996) 85] mutual fund tournament in which two fund managers with unequal midyear performances compete for new cash inflows. When one of the managers is an exogenous benchmark, winning managers index and losing managers gamble. However, when both managers are active, the winning manager is more likely to gamble—expecially when the midyear performance gap is high or when stocks offer high returns and low volatility. Empirical evidence that winning managers gamble has been documented by other researchers, but it has been interpreted as evidence against the tournament model. With a dataset of weekly returns from 1984 to 1996 for 660 mutual funds, we text for other tournament effects predicted by the model. Our results suggest a role for the theory of tournaments in studies of mutual fund behavior.

A Role for the Theory of Tournaments in Studies of Mutual Fund Behavior

We develop a two-period model of a Brown, Harlow & Starks (1996) mutual fund tournament in which two fund managers with unequal midyear performances compete for new cash inflows. When one of the managers is an exogenous benchmark, a winning manager indexes and a losing manager gambles. However, when both managers are active, a winning manager is more likely to gamble - especially when the midyear performance gap is high or when stocks offer high returns and low volatility. Empirical evidence that winning managers gamble has been documented in Chevalier & Ellison (1997), who find a positive correlation between past performance and increases in unsystematic risk, and Busse (1998), who finds that likely winners increase total risk more than likely losers. With a dataset of weekly returns from 1984-1996 for 660 mutual funds, we test for the other managerial gaming effects predicted by the model. Our results suggest a role for the theory of tournaments in studies of mutual fund behavior.

Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry

U NLESS quality is apparent at the point of sale, the market must find ways to ensure the delivery of high-quality products; otherwise, producers have incentives to sell low-quality goods at high-quality prices, thereby assuring a degenerate equilibrium.1 Various solutions to this problem have been proposed, most revolving around bonding mechanisms.2 For bonds to work, however, consumers must react to the delivery of less-than-promised quality.3 In general, the faster consumers detect and react to delivery of low-quality products, the more efficient the market is in delivering high-quality products.4 Despite its prominence in the theoretical literature, direct evidence of consumer response to less-than-promised quality is rarely measured. This is a shortcoming presumably attributable to the difficulty of measuring both the difference between expected and actual product quality and

Chance Constrained Programming Approach to Empirical Analyses of Mutual Fund Investment Strategies*

ABSTRACTChance constrained programming concepts are used to formalize risk and return relations which are then modeled for use in an empirical study of mutual fund behavior during the period 1984 through 1988. The publicly announced strategies of individual funds are used to form ex ante risk classifications which are employed in examining ex post performance. Negative relations between risk and return held in every year of the period studied. The bearing of these negative risk‐return findings for the Bowman paradox, as studied in the strategic management literature, are thus extended from the industrial firms studied by Bowman (and others) and shown to be present even in these investment oriented mutual funds in each of the years of the great bull market from 1984 through 1988. Finally, our use of chance constrained programming enables us to separate risk from return behavior and evaluate their relative strengths as sources of these negative relations, which are found to be more in the returns than the risks.

The Speculative Behavior of Mutual Funds

The Journal of FinanceVolume 27, Issue 2 p. 381-391 Session Topic: Contributed Papers I THE SPECULATIVE BEHAVIOR OF MUTUAL FUNDS Donald G. Simonson, Donald G. Simonson University of New Mexico School of Business and Administrative Sciences. I owe an intellectual debt to William H. Jean. In addition, I appreciate the interest in this study shown by William S. Peters, Raymond R. Reilly, Walton R. L. Taylor, and especially Thomas G. Gies.Search for more papers by this author Donald G. Simonson, Donald G. Simonson University of New Mexico School of Business and Administrative Sciences. I owe an intellectual debt to William H. Jean. In addition, I appreciate the interest in this study shown by William S. Peters, Raymond R. Reilly, Walton R. L. Taylor, and especially Thomas G. Gies.Search for more papers by this author First published: May 1972 https://doi.org/10.1111/j.1540-6261.1972.tb00967.xCitations: 16 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume27, Issue2May 1972Pages 381-391 RelatedInformation