Downside Risk Timing by Mutual Funds

ESG Shareholder Engagement and Downside Risk

“…The importance of downside risk for banks and insurance companies is reflected in the fact that regulatory capital requirements include calculations based on downside risk measures, usually value-at-risk measures. Evidence also suggests that mutual fund managers and their shareholders consider downside risk in their investment decisions (Bodnaruk, Chokaev, and Simonov, 2019;Artavanis, Eksi, and Kadlec, 2019). Finally, while standard mean-variance investors would be more focused on volatility than downside risks, key assumptions in this framework are violated in practice.…”

Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand

“…In the case of funds that experience low downside risk, the negative relationship between EPU and flowperformance sensitivity could be driven by fund managers with downside-risk timing skills actively managing their portfolios' downside risk exposures in different market conditions (Bodnaruk et al, 2019). Nevertheless, our findings suggest that the role of policy uncertainty on investor learning could be stronger depending on certain fund features.…”

“…For example, the volatile past performance, experienced by high IV funds, provides noisy signals for investors regarding managerial ability (Huang et al, 2022) or funds with a global focus could expose investors to greater ambiguity during high uncertainty periods compared to their locally focused alternatives. In the case of funds that experience low downside risk, the negative relationship between EPU and flow‐performance sensitivity could be driven by fund managers with downside‐risk timing skills actively managing their portfolios' downside risk exposures in different market conditions (Bodnaruk et al, 2019). Nevertheless, our findings suggest that the role of policy uncertainty on investor learning could be stronger depending on certain fund features.…”