Economic Policy Uncertainty and Mutual Fund’s Risk Adjusting Behavior in China
- 1 School of Management, Jinan University, Guangzhou, China
Abstract
This paper investigates the effect of economic policy uncertainty on mutual fund’s risk adjusting behavior by using the data of active management mutual funds operated in 2008-2017 in China. The empirical result shows a strong positive relationship between economic policy uncertainty and mutual fund’s risk level. Moreover, mutual funds which performed better in the previous period are more eager to raise their risk levels when the uncertainty is high. It means that mutual funds may still take a risk to chase the limited money when the market sentiment is pessimistic. Our research contributes to the debate of the possible responses made by investors when market is in high uncertainty. It provides a reference for properly making policy decisions and accessing mutual funds.
- Antoniou, C., Harris, R. D. F., & Zhang, R. (2015). Ambiguity Aversion and Stock Market Participation: An Empirical Analysis. Journal of Banking & Finance, 58, 57-70. https://doi.org/10.1016/j.jbankfin.2015.04.009
- Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131, 1593-1636. https://doi.org/10.1093/qje/qjw024
- Brenner, M., & Izhakian, Y. (2018). Asset Pricing and Ambiguity: Empirical Evidence. Journal of Financial Economics, 130, 503-531. https://doi.org/10.1016/j.jfineco.2018.07.007
- Brown, K. C., Harlow, W. V., & Starks, L. T. (1996). Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry. The Journal of Finance, 51, 85-110. https://doi.org/10.1111/j.1540-6261.1996.tb05203.x
- Chen, F., Hope, O.K., Li, Q., & Wang, X. (2018). Flight to Quality in International Markets: Investors’ Demand for Financial Reporting Quality during Political Uncertainty Events. Contemporary Accounting Research, 35, 117-155. https://doi.org/10.1111/1911-3846.12355
- Chen, G. J., Zhang, R. Z., & Zhao, X. Q. (2018). Economic Policy Uncertainty and Stock Risk Characteristics. Journal of Management Sciences in China, 21, 1-27.
- Chevalier, J., & Ellison, G. (1997). Risk Taking by Mutual Funds as a Response to Incentives. Journal of Political Economy, 105, 1167-1200. https://doi.org/10.1086/516389
- Cui, X., Lin, Y., & Yao, S. Y. (2018). Exposure to “Economic Policy Uncertainty” and Risk of Plunging Stock Prices. Financial Economics Research, 33, 98-108.
- Epstein, L. G., & Schneider, M. (2008). Ambiguity, Information Quality, and Asset Pricing. The Journal of Finance, 63, 197-228. https://doi.org/10.1111/j.1540-6261.2008.01314.x
- Gulen, H., & Ion, M. (2015). Policy Uncertainty and Corporate Investment. The Review of Financial Studies, 29, 523-564. https://doi.org/10.1093/rfs/hhv050
- Heath, C., & Tversky, A. (1991). Preference and Belief: Ambiguity and Competence in Choice under Uncertainty. Journal of Risk & Uncertainty, 4, 5-28. https://doi.org/10.1007/BF00057884
- Kempf, A., Ruenzi, S., & Thiele, T. (2009). Employment Risk, Compensation Incentives, and Managerial Risk Taking: Evidence from the Mutual Fund Industry. Journal of Financial Economics, 92, 92-108. https://doi.org/10.1016/j.jfineco.2008.05.001
- Li, F. Y., Shi, Y. D., & Yang, M. Z. (2015). Does Economic Policy Uncertainty Affect Mutual Fund Investment? Research Based on Chinese Economic Policy Uncertainty Index. Securities Market Herald, No. 5, 52-59.