Implication of Regret on Mutual Fund Managers' Risk-Shifting Decision

Bouchra Benyelles and Eser Arisoy
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Bouchra Benyelles: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Eser Arisoy: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We investigate whether regret can explain mutual fund managers' risk-shifting behavior. We propose a theoretical framework by introducing a modi_ed utility function for mutual fund managers who are both risk averse and regret averse. The empirical tests of the proposed framework imply that mutual fund managers who perform worse than their peers (i.e., who exhibit return-regret) tend to have a positive risk-shifting, whereas those who have a higher portfolio volatility (i.e., who exhibit variance-regret) tend to have a negative risk-shifting behavior over the next period. Furthermore, we document that the e_ect of variance regret is more signi_cant for institutional funds than for retail funds. Finally, when considering fund ows, the return-regret e_ect is more signifcant than the variance-regret e_ect, conrming that investors' outows are mainly due fund managers' bad performance relative to their peers. The results are robust to using alternative measures of regret based on funds' potential benchmarks.

Keywords: Regret theory; Mutual Funds; Risk shifting (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-upt
Note: View the original document on HAL open archive server: https://hal.science/hal-02283899v1
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Published in 3rd Workshop of the European Capital Markets Cooperative Research Centre (ECMCRC), Jul 2019, Dublin, Ireland

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02283899

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