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Derivatives do affect mutual fund returns: Evidence from the financial crisis of 1998

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  • Charles Cao
  • Eric Ghysels
  • Frank Hatheway

Abstract

Using a unique data set of detailed balance sheet information on mutual funds, we find that most mutual funds using derivatives do so to a very limited extent that has little discernable impact on returns. However, there exist two types of funds that make more extensive use of derivatives, global funds and specialized domestic equity funds. The risk and return characteristics of these two groups of funds are significantly different from funds employing derivatives sparingly or not at all. Fund managers time their use of derivatives in response to past returns. Evidence during the financial crisis of August 1998 supports the hypothesis that the effects of derivative use are most pronounced during the periods of extreme movement. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:629–658, 2011

Suggested Citation

  • Charles Cao & Eric Ghysels & Frank Hatheway, 2011. "Derivatives do affect mutual fund returns: Evidence from the financial crisis of 1998," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(7), pages 629-658, July.
    • Handle: RePEc:wly:jfutmk:v:31:y:2011:i:7:p:629-658
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    Cited by:

    1. Sanjay Kanti Das, 2012. "Factors Influencing the Mutual Fund Scheme Selection by Retail Investor’s in Assam: An Empirical Analysis," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 3(3), pages 17-23, September.
    2. Kaveh Moradi Dezfouli & Lawrence Kryzanowski, 2016. "Derivatives, Short Selling and US Equity and Bond Mutual Funds," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-44, March.
    3. Daniel Barth & R. Jay Kahn & Phillip J. Monin & Oleg Sokolinskiy, 2024. "Reaching for Duration and Leverage in the Treasury Market," Finance and Economics Discussion Series 2024-039, Board of Governors of the Federal Reserve System (U.S.).
    4. Adam, Tim & Guettler, Andre, 2015. "Pitfalls and perils of financial innovation: The use of CDS by corporate bond funds," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 204-214.
    5. repec:hum:wpaper:sfb649dp2015-013 is not listed on IDEAS
    6. Adam, Tim & Güttler, André, 2015. "Pitfalls and perils of financial innovation: The use of CDS by corporate bond funds," SFB 649 Discussion Papers 2015-013, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    7. Martin Rohleder & Dominik Schulte & Marco Wilkens, 2017. "Management of flow risk in mutual funds," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 31-56, January.
    8. Markus Natter & Martin Rohleder & Dominik Schulte & Marco Wilkens, 2017. "Bond mutual funds and complex investments," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 433-456, October.
    9. Thapa, Chandra & Neupane, Suman & Marshall, Andrew, 2016. "Market liquidity risks of foreign exchange derivatives and cross-country equity portfolio allocations," Journal of Multinational Financial Management, Elsevier, vol. 34(C), pages 46-64.
    10. Harsh Purohit & Preeti Sharma, 2012. "Indian Mutual Fund Industry and the Variables Influencing to Invest in Mutual Fund Market: An Empirical Study of Investors Behaviour," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 3(3), pages 50-54, September.

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