IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Market frictions, investor heterogeneity and persistence in mutual fund performance

Listed author(s):

If there are diseconomies of scale in asset management, any predictability in mutual fund performance will be arbitraged away by rational investors seeking funds with the highest expected performance (Berk and Green, 2004). In contrast, the performance of equity mutual funds persists through time. In this paper, we show how market frictions can reconcile the assumptions of investor rationality and diseconomies of scale with the empirical evidence. More specifically, we extend the model of Berk and Green (2004) to account for financial constraints and heterogeneity in investors’ reservation returns reflecting the idea that less financially sophisticated investors face higher search costs. In our model, both negative and positive expected fund performance are possible in equilibrium. The model also predicts that expected fund performance increases with managerial ability and explains why predictable differences in performance across funds are more prevalent in markets populated by less sophisticated investors.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://econ-papers.upf.edu/papers/1473.pdf
File Function: Whole Paper
Download Restriction: no

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1473.

as
in new window

Length:
Date of creation: Apr 2012
Date of revision: Mar 2015
Handle: RePEc:upf:upfgen:1473
Contact details of provider: Web page: http://www.econ.upf.edu/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Yan, Xuemin (Sterling), 2008. "Liquidity, Investment Style, and the Relation between Fund Size and Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 741-767, September.
  2. Susan E. K. Christoffersen & David K. Musto, 2002. "Demand Curves and the Pricing of Money Management," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1499-1524.
  3. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  4. Gil-Bazo, Javier & Ruiz-Verdú, Pablo, 2008. "When cheaper is better: Fee determination in the market for equity mutual funds," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 871-885, September.
  5. 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.
  6. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
  7. Navone, Marco, 2012. "Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1291-1303.
  8. Navone, Marco, 2012. "Reprint of Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2729-2741.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:1473. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.