Do actively managed mutual funds exploit stock market mispricing?

Jaeram Lee, Hyunglae Jeon, Jangkoo Kang and Changjun Lee

The North American Journal of Economics and Finance, 2020, vol. 53, issue C

Abstract: Constructing a proxy for mispricing with 15 well-known stock market anomalies, we examine whether actively managed mutual funds exploit mispricing. We find that, in the aggregate, mutual funds overweight overvalued stocks and underweight undervalued stocks relative to a passive benchmark, and this tendency is explained by the ill-motivated trades of agency-prone fund managers. In addition, we find that mutual funds with the highest weights in undervalued stocks outperform those with the highest weights in overvalued stocks by an annualized three-factor alpha of 2.12% (t = 2.38), implying that slanting portfolios based on our proxy helps mutual funds improve performance.

Keywords: Mutual funds; Managerial skill; Anomalies; Mispricing (search for similar items in EconPapers)
JEL-codes: G10 G11 G20 G23 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:53:y:2020:i:c:s1062940820300863

DOI: 10.1016/j.najef.2020.101189

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