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Fund Choice Behavior and Estimation of Switching Models: An Experiment

  • Anufriev, M.

    ()

    (University of Technology, Sydney)

  • Tuinstra, J.

    ()

    (University of Amsterdam)

  • Bao, T.

    ()

    (University van Amsterdam)

We run a laboratory experiment that contributes to the finance literature on "return chasing behavior" studying how investors switch between mutual funds driven by past performance of the funds. The subjects in this experiment make discrete choices between several (2, 3 or 4) experimental funds in multiple periods. The time series of funds' profits are exogenously generated prior to the experiment and subjects are paid for that period according to the profit of the fund they choose. The experimental results show that the investment decision can to a large extent be explained by a discrete choice model ("switching model") with a few lags and a predisposition effect. The intensity of choice parameter \beta in the discrete choice model depends on the structure of the profit time series of the funds, and there is no evidence that it is influenced by experience.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 13-04.

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Date of creation: 2013
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Handle: RePEc:ams:ndfwpp:13-04
Contact details of provider: Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
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