Risk shifting in mutual funds: evidence in Thailand

Abstract

The paper aims to examine whether risk-shifting behavior exists in Thai equity mutual funds or not. The empirical analysis studies the period from 2005 to 2022. It is investigated that risk-shifting behavior exists in Thailand by having compensation and employment incentive influences fund managers’ decision on risk shifting.

Firstly, this study uses the states of the market which are positive and negative market returns as the proxy of compensation and employment incentive, respectively. The finding is illustrated that mid-year losers take more risk of the portfolio in the latter half of the year in both positive and negative market return periods where the greater risk adjustment is found in the positive market return period. This relationship is the same for both tax and non-tax-privileged mutual funds. Also, the paper finds a stronger degree of risk shifting in tax than non-tax-privileged mutual funds.

Secondly, this study uses the profitability of the companies which the fund managers work under as another proxy. High and low profitability companies can refer to the domination of compensation and employment incentives respectively. The paper finds that underperformed fund managers increase the portfolio risk in the latter half of the year when working under high-profitability companies. The result is the same for low-profitability companies but a weaker degree of risk shifting.