Mutual Funds and Mispriced Stocks

Doron Avramov (), Si Cheng () and Allaudeen Hameed ()
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Doron Avramov: IDC Herzliya, 4610101 Herzliya, Israel; Hebrew University of Jerusalem, 9190501 Jerusalem, Israel
Si Cheng: Chinese University of Hong Kong, Shatin, Hong Kong
Allaudeen Hameed: National University of Singapore, Singapore 119245

Management Science, 2020, vol. 66, issue 6, 2372-2395

Abstract: We propose a new measure of fund investment skill, active fund overpricing (AFO), encapsulating the fund’s active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund’s investment opportunity set. We find that fund activeness is not sufficient for outperformance: high (low) AFO funds taking active bets on the wrong (right) side of stock mispricing achieve inferior (superior) fund performance. However, high AFO funds receive higher flows during periods of high investor sentiment, when the performance–flow relation becomes weaker.

Keywords: mutual funds; managerial skills; mispricing (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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