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Information acquisition and mutual funds

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  • García, Diego
  • Vanden, Joel M.
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    Abstract

    We study the formation of mutual funds by generalizing the standard competitive noisy rational expectations framework. In our model, informed agents set up mutual funds as a means of selling their private information to uninformed agents. We study the case of imperfect competition among fund managers, where uninformed agents invest simultaneously in multiple mutual funds. The size of the assets under management in the mutual fund industry is determined by endogenizing the agents' information acquisition decisions. Our model yields novel predictions on the informativeness of price, the optimal fees of mutual funds, and the equilibrium risk premium. In particular, we show that a sufficiently competitive mutual fund sector yields more informative prices and a lower equity risk premium.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 144 (2009)
    Issue (Month): 5 (September)
    Pages: 1965-1995

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    Handle: RePEc:eee:jetheo:v:144:y:2009:i:5:p:1965-1995

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Mutual funds Information acquisition Rational expectations equilibrium Markets for information;

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    Cited by:
    1. Lubos Pastor & Robert F. Stambaugh, 2010. "On the Size of the Active Management Industry," NBER Working Papers 15646, National Bureau of Economic Research, Inc.
    2. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
    3. Yuri Pettinicchi, 2012. "Financial Literacy, Information Acquisition and Asset Pricing Implications," Working Papers 2012_03, Department of Economics, University of Venice "Ca' Foscari".
    4. Robert F. Stambaugh, 2014. "Investment Noise and Trends," NBER Working Papers 20072, National Bureau of Economic Research, Inc.
    5. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
    6. Glode, Vincent, 2011. "Why mutual funds "underperform"," Journal of Financial Economics, Elsevier, vol. 99(3), pages 546-559, March.

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