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Mutual Funds and Mispriced Stocks

Author

Listed:
  • Doron Avramov

    (IDC Herzliya, 4610101 Herzliya, Israel; Hebrew University of Jerusalem, 9190501 Jerusalem, Israel)

  • Si Cheng

    (Chinese University of Hong Kong, Shatin, Hong Kong)

  • Allaudeen Hameed

    (National University of Singapore, Singapore 119245)

Abstract

We propose a new measure of fund investment skill, active fund overpricing (AFO), encapsulating the fund’s active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund’s investment opportunity set. We find that fund activeness is not sufficient for outperformance: high (low) AFO funds taking active bets on the wrong (right) side of stock mispricing achieve inferior (superior) fund performance. However, high AFO funds receive higher flows during periods of high investor sentiment, when the performance–flow relation becomes weaker.

Suggested Citation

  • Doron Avramov & Si Cheng & Allaudeen Hameed, 2020. "Mutual Funds and Mispriced Stocks," Management Science, INFORMS, vol. 66(6), pages 2372-2395, June.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:6:p:2372-2395
    DOI: 10.1287/mnsc.2019.3319
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    2. van Binsbergen, Jules H. & Boons, Martijn & Opp, Christian C. & Tamoni, Andrea, 2023. "Dynamic asset (mis)pricing: Build-up versus resolution anomalies," Journal of Financial Economics, Elsevier, vol. 147(2), pages 406-431.
    3. Bofinger, Yannik & Heyden, Kim J. & Rock, Björn, 2022. "Corporate social responsibility and market efficiency: Evidence from ESG and misvaluation measures," Journal of Banking & Finance, Elsevier, vol. 134(C).

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