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Leverage and beta-tilting in mutual funds

URL to cite or link to: http://hdl.handle.net/1802/33522

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Thesis (Ph. D.)--University of Rochester. William E. Simon Graduate School of Business Administration, 2018.
Using a hand-collected data set of mutual fund leverage, I examine how mutual funds use leverage for their portfolio management. I show that funds with higher leverage tilt their portfolios toward lower-beta stocks, which is consistent with the prediction of the CAPM under leverage constraints. This negative relation between fund leverage and equity beta is especially strong when the overall leverage constraint in the market is tightened, whereas the negative relation is weaker if the funds have access to indirect leverage channels such as equity derivatives trading. By decomposing equity beta into equity leverage and asset beta, I also show that the negative relation between fund leverage and equity beta is driven by the negative relation between fund leverage and asset beta rather than by the relation between fund leverage and equity leverage. Managers of levered funds seem to implement their beta-tilting strategy by relying on the asset beta of stocks rather than on the equity leverage of stocks due to the better predictability of asset beta for equity beta, the instability of equity leverage, and the high tracking error volatility associated with equity leverage.
Contributor(s):
Pyung Kun Chu - Author

Ron Kaniel - Thesis Advisor

Primary Item Type:
Thesis
Identifiers:
LCSH Financial leverage--Mathematical models.
LCSH Mutual funds--Mathematical models.
Local Call No. AS38.626
Language:
English
First presented to the public:
3/9/2020
Originally created:
2018
Date will be made available to public:
2020-03-09   
Original Publication Date:
2018
Previously Published By:
University of Rochester
Place Of Publication:
Rochester, N.Y.
Citation:
Extents:
Illustrations - illustrations
Number of Pages - x, 59 pages
License Grantor / Date Granted:
Marcy Strong / 2018-03-27 09:57:41.608 ( View License )
Date Deposited
2018-03-27 09:57:41.608
Submitter:
Marcy Strong

Copyright © This item is protected by copyright, with all rights reserved.

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