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The dynamics of the impact of past performance on mutual fund flows

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Author Info
Goriaev, A.P.
Nijman, T.E.
Werker, B.J.M. (Tilburg University, Center for Economic Research)

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Abstract

This study reconsiders the determinants of flows into US growth funds, focusing in particular on the dynamics of the impact of past performance on flows. We model the flow-performance relationship at the monthly frequency, allowing for dependence of the sensitivity of flows to past performance on size and age of the fund. The dynamics of the impact of past performance is modelled using polynomial lag structures. Performance from 6 to 8 months ago seems to have thestrongest impact on net flows to US growth funds. We observe that performance during the most recent quarter is less important than performance during the remaining three quarters of the first year, suggesting that some investors react to fund performance with a certain lag. Specifications based on average past performance at annual or quarterly frequency are strongly rejected. The first three years of past performance history account for about 90 percent of the total impact of past performance on flows. The well-documented convexity of the flow-performance relationship appears robust to allowing for dependence of this relationship on size and age of the fund. The return on systematic risk factors has a small additional impact on top of the impact of risk-adjusted returns.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:20022

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G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March. [Downloadable!] (restricted)
  2. Goriaev, Alexei & Nijman, Theo E. & Werker, Bas J. M., 2005. "Yet another look at mutual fund tournaments," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 127-137, January. [Downloadable!] (restricted)
  3. Richard Zeckhauser & Jayendu Patel & Darryll Hendricks, 1991. "Nonrational Actors and Financial Market Behavior," NBER Working Papers 3731, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Geweke, John F, 1978. "Temporal Aggregation in the Multiple Regression Model," Econometrica, Econometric Society, vol. 46(3), pages 643-61, May. [Downloadable!] (restricted)
  5. Klaas Baks & Andrew Metrick & Jessica Wachter, . "Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation," Rodney L. White Center for Financial Research Working Papers 18-99, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
  6. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  7. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-98, June. [Downloadable!] (restricted)
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  8. Diane Del Guercio & Paula A. Tkac, 2000. "The determinants of the flow of funds of managed portfolios: mutual funds versus pension funds," Working Paper 2000-21, Federal Reserve Bank of Atlanta. [Downloadable!]
  9. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law & Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
  10. Judith Chevalier & Glenn Ellison, 1999. "Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance," Journal of Finance, American Finance Association, vol. 54(3), pages 875-899, 06. [Downloadable!] (restricted)
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