Mutual Fund Tournaments: The Sorting Bias and New Evidence
56 Pages Posted: 3 Jul 2008 Last revised: 5 Jun 2009
Date Written: June 1, 2009
Researchers have found conflicting results concerning the risk-taking response of underperforming first half mutual fund managers to economic incentives. We show analytically, numerically and empirically that the sorting process typically used in prior studies drives risk-taking findings. When we correct for this issue using a new methodology, we find that first half underperforming managers increase the risk of their portfolios in the second half of the year. We also find that this second half “tournament behavior” is unrelated to equity market returns in the first half of the year.
Keywords: Mutual Funds, Tournaments, Bias
JEL Classification: G23
Suggested Citation: Suggested Citation