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Are fund managers rewarded for taking cyclical risks?

Ellen Ryan

No 134, ESRB Working Paper Series from European Systemic Risk Board

Abstract: The investment fund sector has expanded dramatically since the crisis of 2008-2009. As the sector grows, so do the implications of its risk-taking for the wider financial system and real economy. This paper provides empirical evidence for the existence of wide- spread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronised, cyclical risk-taking which could have systemic effects. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows, which may keep managers from fully internalising the effects of adverse outcomes on their portfolios. The fact that market discipline may not be sufficient to ensure prudential behaviour among managers, combined with the externalities of this risk-taking for the wider system, creates a clear case for macroprudential regulatory intervention. JEL Classification: G23, G11, G28

Keywords: Financial stability; incentive; investment funds; risk-taking (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2022134

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