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Does equity mutual fund factor-risk-shifting pay off? Evidence from the US

Does equity mutual fund factor-risk-shifting pay off? Evidence from the US

Mateus, Cesario, Sarwar, G (Sohan) ORCID: 0000-0003-3060-887X and Todorovic, Natasa (2022) Does equity mutual fund factor-risk-shifting pay off? Evidence from the US. European Journal of Finance. ISSN 1351-847X (Print), 1466-4364 (Online) (doi:

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In this paper, we assess the relationship between risk-shifting of mutual funds, measured as benchmark-adjusted factor-based investment style change following a structural break, and their risk-adjusted performance. We isolate only the breaks in style risk beyond those embedded in the funds’ benchmark index to eliminate any natural style risk changes resulting from varying company fundamentals over time. We group style risk changes into extreme (style rotation), moderate (style drifting), and weak (style-strengthening/weakening) and assess which investment style category is most profitable to shift in to and out of. Our findings show that funds that exhibit breaks generate overall better risk-adjusted performance than those that do not. Funds that are most successful in risk-shifting have both statistically and economically distinct risk-adjusted performance, make shifts towards small/large/value/growth style combinations rather than mid-cap and blend style, exhibit breaks less frequently and has more moderate risk-shifts than funds that are unsuccessful.

Item Type: Article
Uncontrolled Keywords: structural breaks; style risk; risk shifting; performance; mutual funds
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Faculty / School / Research Centre / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA)
Last Modified: 31 Jan 2023 11:54

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