Mutual Funds and Mispriced Stocks

Management Science, Vol. 66, No. 6, 2020

53 Pages Posted: 18 May 2015 Last revised: 9 Feb 2021

See all articles by Doron Avramov

Doron Avramov

Reichman University - Interdisciplinary Center (IDC) Herzliyah

Si Cheng

Syracuse University - Department of Finance

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Date Written: January 19, 2019

Abstract

We propose a new measure of fund investment skill, Active Fund Overpricing (AFO), encapsulating the fund’s active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund’s investment opportunity set. We find that fund activeness is not sufficient for outperformance: high (low) AFO funds take active bets on the wrong (right) side of stock mispricing achieve inferior (superior) fund performance. However, high AFO funds receive higher flows during periods of high investor sentiment, when performance-flow relation becomes weaker.

Keywords: Mutual funds; Managerial Skills; Mispricing

JEL Classification: G1, G2

Suggested Citation

Avramov, Doron and Cheng, Si and Hameed, Allaudeen, Mutual Funds and Mispriced Stocks (January 19, 2019). Management Science, Vol. 66, No. 6, 2020, Available at SSRN: https://ssrn.com/abstract=2607002 or http://dx.doi.org/10.2139/ssrn.2607002

Doron Avramov

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

HOME PAGE: http://faculty.idc.ac.il/davramov/

Si Cheng (Contact Author)

Syracuse University - Department of Finance ( email )

Whitman School of Management
721 University Avenue
Syracuse, NY 13244
United States

HOME PAGE: http://si-cheng.net/

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu.sg/faculty-details/?profId=1

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