Salience and Mutual Fund Investor Demand for Idiosyncratic Volatility

Christopher P. Clifford (), Jon A. Fulkerson (), Russell Jame () and Bradford Jordan
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Christopher P. Clifford: Gatton College of Business and Economics, University of Kentucky, Lexington, Kentucky 40506
Jon A. Fulkerson: School of Business Administration, University of Dayton, Dayton, Ohio 45469
Russell Jame: Gatton College of Business and Economics, University of Kentucky, Lexington, Kentucky 40506

Management Science, 2021, vol. 67, issue 8, 5234-5254

Abstract: We find that mutual fund investors are more likely to both purchase and redeem funds with high idiosyncratic volatility ( IV ). Investors’ tendency to purchase high IV funds is largely driven by high IV funds having more extreme returns, which increases the salience of the fund. Including flexible controls for extreme past returns over multiple horizons decreases the effect of IV on new investment, and experimental evidence corroborates that increasing the salience of extreme returns increases investor demand for IV . Demand for IV is higher among retail investors and funds with otherwise lower salience. Collectively, the evidence suggests that extreme returns attract investor attention and contribute to investors’ risk seeking behavior when purchasing mutual funds.

Keywords: idiosyncratic volatility; limited attention; mutual funds; salience (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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