Does prospect theory explain mutual fund performance? Evidence from China

Bin Yu, Yifan Shen, Xuejun Jin and Qi Xu

Pacific-Basin Finance Journal, 2022, vol. 73, issue C

Abstract: We empirically investigate the role of prospect theory in explaining mutual fund performance. Using a comprehensive open-ended equity fund dataset in China covering a period from 2004 to 2017, we construct a fund-level prospect theory value (TK) measure and find that it positively and significantly predicts future fund performance. This predictive power cannot be explained by existing risk factors or other fund characteristics. High TK funds also attract higher net fund inflows. Both performance persistence and price impact contribute to the fund performance predictability. Comprehensive robustness checks support our main findings.

Keywords: Mutual fund performance; Fund flow; Prospect theory; China (search for similar items in EconPapers)
JEL-codes: G11 G12 G4 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:73:y:2022:i:c:s0927538x22000610

DOI: 10.1016/j.pacfin.2022.101766

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