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Time-varying incentives in the mutual fund industry

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  • Olivier, Jacque

    ()

  • Tay, Anthony

    ()

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    Abstract

    In this paper, the authors provide evidence that the convexity of the flow-performance relationship in the mutual fund industry varies with economic activity. This effect is strongly economically significant: a +/-1% change in GDP growth doubles/eliminates the degree of convexity of the flow-performance relationship. The effect of economic activity dominates that of market conditions and can be rationalized by the behavior of investors who smooth consumption while displaying a disposition effect. Our finding has two major implications: first, it rationalizes the risk-shifting behavior of mutual fund managers and provides support for the seminal flow-based tournament hypothesis over the more recent "career concern" explanation. Second, it explains why mutual fund performance varies with the business cycle.

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    Bibliographic Info

    Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 925.

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    Length: 42 pages
    Date of creation: 01 Nov 2009
    Date of revision:
    Handle: RePEc:ebg:heccah:0925

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    Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
    Web page: http://www.hec.fr/
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    Related research

    Keywords: Mutual funds; Incentives; Economic activity; Risk-shifting; Performance;

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