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

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  • Dumitrescu, Ariadna
  • Gil-Bazo, Javier

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.

Suggested Citation

  • Dumitrescu, Ariadna & Gil-Bazo, Javier, 2018. "Market frictions, investor sophistication, and persistence in mutual fund performance," Journal of Financial Markets, Elsevier, vol. 40(C), pages 40-59.
    • Handle: RePEc:eee:finmar:v:40:y:2018:i:c:p:40-59
    DOI: 10.1016/j.finmar.2018.01.001
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    References listed on IDEAS

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    Cited by:

    1. Victor DeMiguel & Javier Gil-Bazo & Francisco J. Nogales & André A. P. Santos, 2021. "Can Machine Learning Help to Select Portfolios of Mutual Funds?," Working Papers 1245, Barcelona School of Economics.
    2. Katarzyna Perez & £ukasz Szymczyk, 2022. "Actual rate of the management fee in mutual funds of different styles," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 17(4), pages 969-1014, December.
    3. María Isabel Cambón Murcia & Ramiro Losada, 2013. "Evidence from purchases and redemptions in the Spanish equity fund market," CNMV Working Papers CNMV Working Papers no 56, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    4. Ramiro Losada, 2022. "La información pública periódica de los fondos de inversión: como influyen en las decisiones de los inversores," CNMV Documentos de Trabajo CNMV Documentos de Trabaj, CNMV- Comisión Nacional del Mercado de Valores - Departamento de Estudios y Estadísticas.
    5. DeMiguel, Victor & Gil-Bazo, Javier & Nogales, Francisco J. & Santos, André A.P., 2023. "Machine learning and fund characteristics help to select mutual funds with positive alpha," Journal of Financial Economics, Elsevier, vol. 150(3).
    6. Dumitrescu, Ariadna & Järvinen, Jesse & Zakriya, Mohammed, 2023. "Hidden Gem or Fool’s Gold: Can passive ESG ETFs outperform the benchmarks?," International Review of Financial Analysis, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    Mutual fund performance persistence; Market frictions; Investor sophistication;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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