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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