A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization

Yale ICF Working Paper No. 00-50

65 Pages Posted: 4 Sep 2001

See all articles by Matthew I. Spiegel

Matthew I. Spiegel

Yale University - Yale School of Management, International Center for Finance

Harry Mamaysky

Columbia University - Columbia Business School

Date Written: August 2001

Abstract

This paper presents a model in which investors cannot remain in the market to trade at all times. As a result, they have an incentive to set up trading firms or financial market intermediaries (FMI's) to take over their portfolio while they engage in other activities. Previous research has assumed that such firms act like individuals endowed with a utility function. Here, as in reality, they are firms that simply take orders from their investors. From this setting emerges a theory of mutual funds and other FMI's (such as investment houses, banks, and insurance companies) with implications for their trading styles, as well as for their effects on asset prices. The model provides theoretical support for past empirical findings, and provides new empirical predictions which are tested in this paper.

JEL Classification: G20, G12

Suggested Citation

Spiegel, Matthew I. and Mamaysky, Harry, A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization (August 2001). Yale ICF Working Paper No. 00-50, Available at SSRN: https://ssrn.com/abstract=281000 or http://dx.doi.org/10.2139/ssrn.281000

Matthew I. Spiegel (Contact Author)

Yale University - Yale School of Management, International Center for Finance ( email )

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Harry Mamaysky

Columbia University - Columbia Business School ( email )

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