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Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry

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  • Vincent Glode
  • Burton Hollifield
  • Marcin Kacperczyk
  • Shimon Kogan

Abstract

We provide new empirical evidence suggesting that the marginal investor in mutual funds behaves differently across market conditions. If the marginal investor allocates capital across mutual funds rationally, then the relative performance of funds should be unpredictable. We find however that relative fund performance is predictable after periods of high market returns but not after periods of low market returns. The asymmetric predictability in performance we document cannot be explained by time-varying differences in transaction costs or style exposures between funds, or by sample selection. Consistent with the hypothesis that the asymmetric predictability in performance may be driven by unsophisticated investors' mistakes when allocating capital, we document that performance predictability is more pronounced for funds that cater to retail investors than for funds that cater to institutional investors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15038.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15038

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Cited by:
  1. Salganik, G., 2010. "Essays on investment flows of hedge fund and mutual fund investors," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-4378358, Tilburg University.
  2. Narulita, Wista A. & Parwada, Jerry T., 2012. "Evolution of a mutual fund market: Empirical analysis of simultaneous growth and decline by fund category in Indonesia," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(5), pages 1217-1236.
  3. Badrinath, S.G. & Gubellini, S., 2011. "On the characteristics and performance of long-short, market-neutral and bear mutual funds," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(7), pages 1762-1776, July.
  4. Glode, Vincent, 2011. "Why mutual funds "underperform"," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(3), pages 546-559, March.

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