University of Pennsylvania, Wharton School
Information about this author at RePEc
NBER Working Papers and Publications
|June 2009||Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry|
with Burton Hollifield, Marcin Kacperczyk, Shimon Kogan: w15038
We provide new empirical evidence suggesting that the marginal investor in mutual funds behaves differently across market conditions. If the marginal investor allocates capital across mutual funds rationally, then the relative performance of funds should be unpredictable. We find however that relative fund performance is predictable after periods of high market returns but not after periods of low market returns. The asymmetric predictability in performance we document cannot be explained by time-varying differences in transaction costs or style exposures between funds, or by sample selection. Consistent with the hypothesis that the asymmetric predictability in performance may be driven by unsophisticated investors' mistakes when allocating capital, we document that performance predictabil...