Abstract

http://ssrn.com/abstract=2263944
 


 



Performance Measurement with Uncertain Risk Loadings


Francesco A. Franzoni


University of Lugano; Swiss Finance Institute

Martin C. Schmalz


The Stephen M. Ross School of Business at the University of Michigan

October 24, 2014

Swiss Finance Institute Research Paper No. 13-41
Ross School of Business Paper No. 1194

Abstract:     
We study the implications of uncertainty about risk loadings for mutual fund investors' capital allocation decisions. We show that the signal-to-noise ratio is higher and rational investors give more weight to performance signals when market returns are moderate, compared to times of very high or low market returns. Consistent with the model predictions, the flow-performance relation is about twice as steep in moderate times, and the difference is larger for types of funds with more uncertainty about risk loadings. The model-implied degree of parameter uncertainty is consistent with direct estimates of parameter uncertainty from fund holdings and daily returns.

Number of Pages in PDF File: 66

Keywords: Bayesian learning, parameter uncertainty, mutual funds, flow-performance

JEL Classification: G00, G20

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Date posted: May 13, 2013 ; Last revised: October 25, 2014

Suggested Citation

Franzoni, Francesco A. and Schmalz, Martin C., Performance Measurement with Uncertain Risk Loadings (October 24, 2014). Swiss Finance Institute Research Paper No. 13-41; Ross School of Business Paper No. 1194. Available at SSRN: http://ssrn.com/abstract=2263944 or http://dx.doi.org/10.2139/ssrn.2263944

Contact Information

Francesco A. Franzoni
University of Lugano ( email ) ( email )
University of Lugano
Via G. Buffi 13
Lugano, 6904
Switzerland
Swiss Finance Institute ( email ) ( email )
University of Lugano
Via G. Buffi 13
Lugano, 6904
Switzerland
Martin C. Schmalz (Contact Author)
The Stephen M. Ross School of Business at the University of Michigan ( email )
701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States
7347630304 (Phone)
HOME PAGE: http://https://sites.google.com/site/martincschmalz/
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