Work

Synthetic leverage and fund risk-taking

Year: 2025

Type: article

Abstract: This paper studies mutual fund risk-taking through synthetic leverage. For this purpose, I propose a novel measure of synthetic leverage that does not rely on confidential regulatory data. In my empirical analysis of German equity funds, I find that synthetic leverage strongly contributes to overall risk-taking. Importantly, a simple validation exercise based on regulatory data indicates that synthetically leveraged funds indeed display larger derivatives exposures. Overall, these results indicate that synthetic leverage should be closely monitored. • This paper proposes a novel measure of synthetic leverage that does not require confidential regulatory data. • A validation exercise indicates that the proposed measure indeed captures funds’ (unobserved) derivatives exposures. • Synthetic leverage contributes to overall risk-taking. • Risk-taking funds underperform.

Source: Journal of International Money and Finance

DOI: 10.1016/j.jimonfin.2025.103308

Author: Daniel Fricke

Institution: Deutsche Bundesbank

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,130