Mutual fund tournaments: State-dependent risk taking with transaction costs

Lu Zhao, Liang Wang and Ronghua Luo

Emerging Markets Review, 2024, vol. 59, issue C

Abstract: We investigate the state-varying risk taking behavior of actively managed mutual funds by considering their transaction costs in trading securities. Our tournament model equilibrium suggests that, while transaction costs are low, interim winner funds tend to hold more volatile portfolios than interim losers. However, while transaction costs are high, the interim losers may take more risk than interim winners, and such behavior is more significant in the negative risk premium state for funds. We provide robust empirical evidence of state-varying risk-taking in both U.S. and China from 2005 to 2019. The U.S. mutual fund tournaments are less influenced given the bid-ask spreads on the stock market are 20 bps lower than that in China.

Keywords: Compensation incentive; Interim performance; Risk taking; Transaction cost (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014124000141
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:59:y:2024:i:c:s1566014124000141

DOI: 10.1016/j.ememar.2024.101119

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().