Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/265235 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
ESRB Working Paper Series No. 134
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
The investment fund sector has expanded dramatically since the crisis of 2008-2009. As the sector grows, so do the implications of its risk-taking for the wider financial system and real economy. This paper provides empirical evidence for the existence of wide- spread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronised, cyclical risk-taking which could have systemic effects. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows, which may keep managers from fully internalising the effects of adverse outcomes on their portfolios. The fact that market discipline may not be sufficient to ensure prudential behaviour among managers, combined with the externalities of this risk-taking for the wider system, creates a clear case for macroprudential regulatory intervention.
Subjects: 
Financial stability
investment funds
incentive
risk-taking
macroprudential policy
JEL: 
G23
G11
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-256-0
Document Type: 
Working Paper

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