Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry

Vincent Glode, Burton Hollifield (), Marcin Kacperczyk and Shimon Kogan

No 15038, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
Date: 2009-06
Note: AP CF
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