The views expressed herein are those of the authors and do not necessarily reflect the views of the NASDAQ OMX Group Inc. We thank Daniel Deli for providing the N-SAR data, and Jennifer Juergens, Wilson Kong, and XiaoxinWang for excellent research assistance. Participants at the Cornell University's Derivative Securities Conference, Peter Carr, Ian Domowitz, Robert Jarrow, Bill Kracaw, Harold Mulherin, and Robert Webb (the Editor) provided valuable comments and suggestions.
Derivatives do affect mutual fund returns: Evidence from the financial crisis of 1998†
Article first published online: 6 OCT 2010
© 2010 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 31, Issue 7, pages 629–658, July 2011
How to Cite
Cao, C., Ghysels, E. and Hatheway, F. (2011), Derivatives do affect mutual fund returns: Evidence from the financial crisis of 1998. J. Fut. Mark., 31: 629–658. doi: 10.1002/fut.20489
- Issue published online: 12 APR 2011
- Article first published online: 6 OCT 2010
- Manuscript Accepted: AUG 2010
- Manuscript Received: APR 2010
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