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Rational Cross-Sectional Differences in Market Efficiency: Evidence from Mutual Fund Returns

  • Schultz, Paul
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    Markets should be inefficient enough to allow returns to security analysis to adequately compensate the marginal analyst for his efforts. Cross-sectional differences in the costs of analysis therefore imply cross-sectional differences in market efficiency and in before-cost returns to smart investors. Small growth stocks are difficult to analyze and costly to trade. I find that the abnormal returns of mutual fund investments in small growth stocks from 1980 to 2006 averaged 0.76% per month. Large value stocks are easier to analyze and cheaper to trade. Mutual funds earned average monthly abnormal returns of only 0.05% in large value stocks during the same period.

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    File URL: http://journals.cambridge.org/abstract_S0022109010000359
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    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 45 (2010)
    Issue (Month): 04 (August)
    Pages: 847-881

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    Handle: RePEc:cup:jfinqa:v:45:y:2010:i:04:p:847-881_00
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