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Durham Research Online
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Prospect Theory and Mutual Fund Flows

Gu, Ariel and Yoo, Hong Il (2021) 'Prospect Theory and Mutual Fund Flows.', Economics letters., 201 . p. 109776.

Abstract

We evaluate the hypothesis that investors seek portfolios that display attractive return distributions in terms of Prospect Theory (PT). We consider the mutual fund market in the U.S. as an interesting testbed because fund investors are known to be return-chasing and about a half of U.S. households own mutual funds. Using monthly flow data from 1999-2019, we find that mutual funds attract higher net flows when they have better PT values. We obtain similar results when PT is replaced with Rank-Dependent Utility, a closely related theory that does not require a particular choice of reference points. Our results are consistent with recent evidence that fund flows exhibit heightened sensitivity to extreme performance measures.

Item Type:Article
Full text:Publisher-imposed embargo until 11 August 2022.
(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives 4.0.
File format - PDF
(457Kb)
Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1016/j.econlet.2021.109776
Publisher statement:© 2021 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Date accepted:07 February 2021
Date deposited:22 February 2021
Date of first online publication:11 February 2021
Date first made open access:11 August 2022

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