Synthetic Leverage and Fund Risk-Taking

Daniel Fricke ()

No 126, ESRB Working Paper Series from European Systemic Risk Board

Abstract: Mutual fund risk-taking via active portfolio rebalancing varies both in the cross-section and over time. In this paper, I show that the same is true for funds’ off-balance sheet risk-taking, even after controlling for on-balance sheet activities. For this purpose, I propose a novel measure of synthetic leverage, which can be estimated based on publicly available information. In the empirical application, I show that German equity funds have increased their risk-taking via synthetic leverage from mid-2015 up until early 2019. In the cross-section, I find that synthetically leveraged funds tend to underperform and display higher levels of fragility. JEL Classification: G11, G23, E44

Keywords: derivatives; leverage; mutual funds; risk-taking; securities lending (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cwa, nep-isf and nep-rmg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2021126

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