Search-for-yield in Portuguese fixed-income mutual funds and monetary policy

• Author(s): Mello, Mariana Aires de Campos de Sampaio e
• Date: 2015
• Persistent ID: http://hdl.handle.net/10362/15346
• Origin: Repositório Institucional da UNL
• Subject(s): Search-for-yield; Mutual funds; Monetary policy; Risk exposure
• Document Type: Master thesis
• Language: English
• Advisor(s): Ferreira, Miguel
• Contributor(s): RUN

Description

This paper studies the effects of monetary policy on mutual fund risk taking using a sample of Portuguese fixed-income mutual funds in the 2000-2012 period. Firstly I estimate time-varying measures of risk exposure (betas) for the individual funds, for the benchmark portfolio, as well as for a representative equally-weighted portfolio, through 24-month rolling regressions of a two-factor model with two systematic risk factors: interest rate risk (TERM) and default risk (DEF). Next, in the second phase, using the estimated betas, I try to understand what portion of the risk exposure is in excess of the benchmark (active risk) and how it relates to monetary policy proxies (one-month rate, Taylor residual, real rate and first principal component of a cross-section of government yields and rates). Using this methodology, I provide empirical evidence that Portuguese fixed-income mutual funds respond to accommodative monetary policy by significantly increasing exposure, in excess of their benchmarks, to default risk rate and slightly to interest risk rate as well. I also find that the increase in funds’ risk exposure to gain a boost in return (search-for-yield) is more pronounced following the 2007-2009 global financial crisis, indicating that the current historic low interest rates may incentivize excessive risk taking. My results suggest that monetary policy affects the risk appetite of non-bank financial intermediaries.

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