Market frictions, investor sophistication, and persistence in mutual fund performance

Ariadna Dumitrescu () and Javier Gil-Bazo

Journal of Financial Markets, 2018, vol. 40, issue C, 40-59

Abstract: We extend the model of Berk and Green (2004) to investigate the impact of two frictions, search costs and financial constraints, on mutual fund performance. Our model predicts the survival of underperforming funds and delivers two new predictions: 1) differences in performance across funds are likely to persist; and 2) mutual funds targeted to less sophisticated investors should exhibit higher dispersion in expected performance. Using data on U.S. domestic diversified equity mutual funds we find empirical support for these predictions.

Keywords: Mutual fund performance persistence; Market frictions; Investor sophistication (search for similar items in EconPapers)
JEL-codes: G2 G23 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:40:y:2018:i:c:p:40-59

DOI: 10.1016/j.finmar.2018.01.001

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