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Paper #1473

Títol:
Market frictions, investor heterogeneity and persistence in mutual fund performance
Autors:
Ariadna Dumitrescu i Javier Gil-Bazo
Data:
Abril 2012 (Revisió: Març 2015)
Resum:
If there are diseconomies of scale in asset management, any predictability in mutual fund performance will be arbitraged away by rational investors seeking funds with the highest expected performance (Berk and Green, 2004). In contrast, the performance of equity mutual funds persists through time. In this paper, we show how market frictions can reconcile the assumptions of investor rationality and diseconomies of scale with the empirical evidence. More specifically, we extend the model of Berk and Green (2004) to account for financial constraints and heterogeneity in investors’ reservation returns reflecting the idea that less financially sophisticated investors face higher search costs. In our model, both negative and positive expected fund performance are possible in equilibrium. The model also predicts that expected fund performance increases with managerial ability and explains why predictable differences in performance across funds are more prevalent in markets populated by less sophisticated investors.
Paraules clau:
mutual fund performance persistence; market frictions; investor sophistication.
Codis JEL:
G2; G23.
Àrea de Recerca:
Finances i Comptabilitat

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