Asymmetric contracts, cash flows and risk taking of mutual funds

Jiliang Sheng, Jian Wang, Xiaoting Wang and Jun Yang

Economic Modelling, 2014, vol. 38, issue C, 435-442

Abstract: Fund managers in delegated portfolio management face asymmetries in their compensation contracts and in the fund flows contingent on their funds' performance relative to a benchmark. In this study we investigate the impacts of contract asymmetry and fund flow asymmetry on the risk-taking behavior of open-end funds whose delegation contracts are performance based, and show that their impacts are opposite. When the two asymmetries apply simultaneously, the impact of one on the fund's risk-taking alleviates the impact of the other. Raising the return-sharing ratio cannot make the manager take more risk, but increasing the cash flow volume can. We also show that the tracking-error variance can measure the degree of risk that the fund takes.

Keywords: Delegation contract; Cash flow; Asymmetry; Risk-taking (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:38:y:2014:i:c:p:435-442

DOI: 10.1016/j.econmod.2014.01.024

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