Do Mutual Funds’ Exposure to Financial Stress Predict Their Future Returns? Evidence From China

Author:

Zhu Sha1ORCID,Lai Fujun1ORCID,Deng Jie2,Wang Qian3

Affiliation:

1. Yunnan University of Finance and Economics, Kunming, China

2. China Chengxin International Credit Rating Co. Ltd., Beijing, China

3. Central University of Finance and Economics, Beijing, China

Abstract

How macroeconomic risk affects asset prices is an important issue in the academic and industrial fields. This paper measures Chinese financial stress (CFSI) by constructing a new index, and empirically verifies the pricing relationship between financial stress and Chinese mutual fund returns. First, we use eight source variables, which are the driving forces of financial market risk and financial stability, from bank, security, and foreign exchange markets, to build a new index representing financial stress. In addition, we estimate mutual funds’ exposure to financial stress and find that the resulting financial stress betas explain a significant proportion of the cross-sectional dispersion in mutual fund returns. Moreover, this result also remains robust when we conduct tests using other macroeconomic indices or control for the Fama–French and Carhart four factors. Hence, we argue that financial stress is a powerful determinant of cross-sectional differences in Chinese mutual fund returns and plays an important role in the sustainable development of financial markets.

Funder

the Scientific Research Fund Project of Yunnan Education Department

The Scientific Research Foundation of Yunnan University of Finance and Economics

Publisher

SAGE Publications

Subject

General Social Sciences,General Arts and Humanities

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