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The wisdom of crowds: Mutual fund investors’ aggregate asset allocation decisions

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  • Chalmers, John
  • Kaul, Aditya
  • Phillips, Blake

Abstract

We find that the aggregate asset allocation decisions of US mutual fund investors depend on economic conditions. Both anticipated economic downturns and periods of turmoil lead investors to direct flow away from risky equity funds and towards lower-risk money market funds. These patterns are markedly stronger for investors in low cost and low turnover funds relative to investors in high cost and high turnover funds, consistent with sophisticated investors being more sensitive to changing conditions. Benchmarked against a buy-and-hold strategy, these asset allocation strategies reduce risk without degrading the risk-return trade-off. Our evidence suggests that individual investors, often dismissed as noise traders, collectively react to economic signals in a sensible manner when determining asset allocations.

Suggested Citation

  • Chalmers, John & Kaul, Aditya & Phillips, Blake, 2013. "The wisdom of crowds: Mutual fund investors’ aggregate asset allocation decisions," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3318-3333.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:9:p:3318-3333
    DOI: 10.1016/j.jbankfin.2013.05.004
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    2. repec:eee:finmar:v:37:y:2018:i:c:p:52-69 is not listed on IDEAS
    3. Bessler, Wolfgang & Kurmann, Philipp, 2014. "Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 151-166.
    4. repec:bla:acctfi:v:57:y:2017:i:3:p:759-788 is not listed on IDEAS
    5. Muñoz, Fernando, 2016. "Cash flow timing skills of socially responsible mutual fund investors," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 110-124.
    6. repec:eee:phsmap:v:501:y:2018:i:c:p:188-204 is not listed on IDEAS
    7. Simlai, Prodosh E., 2016. "Time-varying risk, mispricing attributes, and the accrual premium," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 150-161.

    More about this item

    Keywords

    Mutual fund; Mutual fund flow; Asset allocation;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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