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Relative Performance, Risk and Entry in the Mutual Fund Industry

  • Gyöngyi Lóránth
  • Emanuela Sciubba

    (Department of Economics, Mathematics & Statistics, Birkbeck)

This paper analyses the impact of the emergence of new funds on the portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance within a dynamic model. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the on-going process of the creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterises the mutual fund industry could explain why relative performance evaluation is widely in use.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0612.pdf
File Function: First version, 2006
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0612.

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Date of creation: Nov 2006
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Handle: RePEc:bbk:bbkefp:0612
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  1. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March.
  2. Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
  3. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
  4. repec:ner:tilbur:urn:nbn:nl:ui:12-167598 is not listed on IDEAS
  5. Khorana, Ajay & Servaes, Henri, 1999. "The Determinants of Mutual Fund Starts," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1043-74.
  6. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  7. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
  8. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
  9. repec:dgr:kubcen:200094 is not listed on IDEAS
  10. Luís M. B. Cabral, 2003. "R&D Competition when firms Choose Variance," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 139-150, 03.
  11. Ahmed, Parvez, 2001. "Forecasting correlation among equity mutual funds," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1187-1208, June.
  12. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
  13. Emanuela Sciubba, 2000. "Relative Performance and Herding in Financial Markets," Econometric Society World Congress 2000 Contributed Papers 1570, Econometric Society.
  14. Busse, Jeffrey A., 2001. "Another Look at Mutual Fund Tournaments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 53-73, March.
  15. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
  16. Goriaev, Alexei & Nijman, Theo E. & Werker, Bas J. M., 2005. "Yet another look at mutual fund tournaments," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 127-137, January.
  17. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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