Synthetic leverage and fund risk-taking

Daniel Fricke

Journal of International Money and Finance, 2025, vol. 154, issue C

Abstract: This paper studies mutual fund risk-taking through synthetic leverage. For this purpose, I propose a novel measure of synthetic leverage that does not rely on confidential regulatory data. In my empirical analysis of German equity funds, I find that synthetic leverage strongly contributes to overall risk-taking. Importantly, a simple validation exercise based on regulatory data indicates that synthetically leveraged funds indeed display larger derivatives exposures. Overall, these results indicate that synthetic leverage should be closely monitored.

Keywords: Leverage; Risk-taking; Derivatives; Securities lending; Mutual funds (search for similar items in EconPapers)
JEL-codes: E44 G11 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:154:y:2025:i:c:s0261560625000439

DOI: 10.1016/j.jimonfin.2025.103308

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