IDEAS home Printed from https://ideas.repec.org/p/bbk/bbkefp/0612.html
   My bibliography  Save this paper

Relative Performance, Risk and Entry in the Mutual Fund Industry

Author

Listed:
  • Gyöngyi Lóránth
  • Emanuela Sciubba

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

This paper analyses the impact of the emergence of new funds on the portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance within a dynamic model. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the on-going process of the creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterises the mutual fund industry could explain why relative performance evaluation is widely in use.

Suggested Citation

  • Gyöngyi Lóránth & Emanuela Sciubba, 2006. "Relative Performance, Risk and Entry in the Mutual Fund Industry," Birkbeck Working Papers in Economics and Finance 0612, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:0612
    as

    Download full text from publisher

    File URL: https://eprints.bbk.ac.uk/id/eprint/26931
    File Function: First version, 2006
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Khorana, Ajay & Servaes, Henri, 1999. "The Determinants of Mutual Fund Starts," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1043-1074.
    2. Hans K. Hvide, 2002. "Tournament Rewards and Risk Taking," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 877-898, October.
    3. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-581, June.
    4. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    5. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    6. repec:bla:jfinan:v:53:y:1998:i:5:p:1589-1622 is not listed on IDEAS
    7. Janice Ballou & Matthew Mishkind & Geraldine Mooney & Welmoet van Kammen, "undated". "National Science Foundation Report on Efficiency of Grant Size and Duration: Principal Investigator FY 2001 Grant Award Survey and Institutional Survey," Mathematica Policy Research Reports bdadbcef4daf4bf8b94a0fb7f, Mathematica Policy Research.
    8. Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 433-446.
    9. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    10. Luís M. B. Cabral, 2003. "R&D Competition when firms Choose Variance," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 139-150, March.
    11. Emanuela Sciubba, 2000. "Relative Performance and Herding in Financial Markets," Econometric Society World Congress 2000 Contributed Papers 1570, Econometric Society.
    12. Goriaev, A.P. & Palomino, F.A. & Prat, A., 2000. "Mutual Fund Tournament : Risk Taking Incentives Induced by Ranking Objectives," Discussion Paper 2000-94, Tilburg University, Center for Economic Research.
    13. Goriaev, Alexei & Nijman, Theo E. & Werker, Bas J. M., 2005. "Yet another look at mutual fund tournaments," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 127-137, January.
    14. Ahmed, Parvez, 2001. "Forecasting correlation among equity mutual funds," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1187-1208, June.
    15. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
    16. Busse, Jeffrey A., 2001. "Another Look at Mutual Fund Tournaments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 53-73, March.
    17. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March.
    18. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. "Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    19. Panel on Estimates of Poverty for Small Geographic Areas of which Allen L. Schirm is a member, "undated". "Small-Area Income and Poverty Estimates: Priorities for 2000 and Beyond," Mathematica Policy Research Reports a0588a6815864c46b8974e1d1, Mathematica Policy Research.
    20. Golec, Joseph H., 1992. "Empirical Tests of a Principal-Agent Model of the Investor-Investment Advisor Relationship," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(1), pages 81-95, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Curatola, Giuliano, 2022. "Price impact, strategic interaction and portfolio choice," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    2. Axel Stahmer, 2015. "Fund flows inducing mispricing of risk in competitive financial markets," ESMT Research Working Papers ESMT-15-04, ESMT European School of Management and Technology.
    3. Suleyman Basak & Dmitry Makarov, 2014. "Strategic Asset Allocation in Money Management," Journal of Finance, American Finance Association, vol. 69(1), pages 179-217, February.
    4. Basak, Suleyman & Makarov, Dmitry, 2012. "Difference in interim performance and risk taking with short-sale constraints," Journal of Financial Economics, Elsevier, vol. 103(2), pages 377-392.
    5. Suleyman Basak & Dmitry Makarov, 2013. "Competition among Portfolio Managers and Asset Specialization," Working Papers w0194, New Economic School (NES).
    6. Chia-Ying Chan & Christine W. Lai & Liang-Chung Lee, 2017. "Strategic Choice of Risk: Evidence from Mutual Fund Families," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 125-163, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Basak, Suleyman & Makarov, Dmitry, 2012. "Difference in interim performance and risk taking with short-sale constraints," Journal of Financial Economics, Elsevier, vol. 103(2), pages 377-392.
    2. Debapriya Jojo Paul & Julia Henker & Sian Owen, 2019. "The aggregate impacts of tournament incentives in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 22(2), pages 441-476, June.
    3. Chia-Ying Chan & Christine W. Lai & Liang-Chung Lee, 2017. "Strategic Choice of Risk: Evidence from Mutual Fund Families," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 125-163, February.
    4. Eriksen, Kristoffer W. & Kvaløy, Ola, 2014. "Myopic risk-taking in tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 37-46.
    5. Hallahan, Terrence & Faff, Robert, 2009. "Tournament behavior in Australian superannuation funds: A non-parametric analysis," Global Finance Journal, Elsevier, vol. 19(3), pages 307-322.
    6. Lütje, Torben, 2004. "To Be Good or To Be Better: Asset Managers Attitudes Towards Herding," Hannover Economic Papers (HEP) dp-297, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    7. Sheng, Jiliang & Wang, Jian & Wang, Xiaoting & Yang, Jun, 2014. "Asymmetric contracts, cash flows and risk taking of mutual funds," Economic Modelling, Elsevier, vol. 38(C), pages 435-442.
    8. Aymen Karoui & Iwan Meier, 2015. "Fund performance and subsequent risk: a study of mutual fund tournaments using holdings-based measures," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 29(1), pages 1-20, February.
    9. Raphaëlle Bellando, 2008. "Le conflit d'agence dans la gestion déléguée de portefeuille : une revue de littérature," Revue d'économie politique, Dalloz, vol. 118(3), pages 317-339.
    10. Emmanuel Mamatzakis & Mike Tsionas, 2018. "A Bayesian dynamic model to test persistence in funds' performance," Working Paper series 18-23, Rimini Centre for Economic Analysis.
    11. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
    12. Raphaëlle Bellando & Sébastien Ringuedé, 2007. "Compétition entre fonds et prise de risque excessive : une application empirique au cas des OPCVM actions de droit français," Post-Print halshs-00226341, HAL.
    13. Alexander Kempf & Stefan Ruenzi, 2008. "Tournaments in Mutual-Fund Families," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
    14. Li, C. Wei & Tiwari, Ashish & Tong, Lin, 2022. "Mutual fund tournaments and fund Active Share," Journal of Financial Stability, Elsevier, vol. 63(C).
    15. Emmanuel Mamatzakis & Mike G. Tsionas, 2021. "Testing for persistence in US mutual funds’ performance: a Bayesian dynamic panel model," Annals of Operations Research, Springer, vol. 299(1), pages 1203-1233, April.
    16. Stéphane Robin & Kateřina Strážnická & Marie Claire Villeval, 2021. "Bubbles and incentives: an experiment on asset markets," Economic and Political Studies, Taylor & Francis Journals, vol. 9(1), pages 68-89, January.
    17. Paul Cox & Patricia Wicks, 2011. "Institutional Interest in Corporate Responsibility: Portfolio Evidence and Ethical Explanation," Journal of Business Ethics, Springer, vol. 103(1), pages 143-165, September.
    18. Raphaëlle BELLANDO & Sébastien RINGUEDE, 2009. "Compétition entre fonds et prise de risque excessive : une application empirique au cas français," LEO Working Papers / DR LEO 332, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    19. Igan, Deniz & Pinheiro, Marcelo, 2012. "The effects of relative performance objectives on financial markets," MPRA Paper 43452, University Library of Munich, Germany.
    20. Cullen, Grant & Gasbarro, Dominic & Monroe, Gary S. & Zumwalt, J. Kenton, 2012. "Changes to mutual fund risk: Intentional or mean reverting?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 112-120.

    More about this item

    Keywords

    Relative performance evaluation; fund management industry; ranking objectives; family of funds.;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bbk:bbkefp:0612. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.bbk.ac.uk/departments/ems/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.