Working Paper: NBER ID: w15038
Authors: Vincent Glode; Burton Hollifield; Marcin Kacperczyk; Shimon Kogan
Abstract: We provide new empirical evidence suggesting that the marginal investor in mutual funds behaves differently across market conditions. If the marginal investor allocates capital across mutual funds rationally, then the relative performance of funds should be unpredictable. We find however that relative fund performance is predictable after periods of high market returns but not after periods of low market returns. The asymmetric predictability in performance we document cannot be explained by time-varying differences in transaction costs or style exposures between funds, or by sample selection. Consistent with the hypothesis that the asymmetric predictability in performance may be driven by unsophisticated investors' mistakes when allocating capital, we document that performance predictability is more pronounced for funds that cater to retail investors than for funds that cater to institutional investors.
Keywords: mutual funds; investor behavior; performance predictability; market conditions
JEL Codes: G11; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High market returns (G17) | Predictability of mutual fund performance (G17) |
| Low market returns (G19) | Disappearance of performance predictability (D29) |
| Retail investors (G24) | Capital allocation mistakes (G31) |
| Performance sensitivity to fund flows (G11) | High market returns (G17) |
| Performance sensitivity to fund flows (G11) | Low market returns (G19) |
| Retail investors (G24) | Performance sensitivity to fund flows (G11) |