Mutual Fund Competition in the Presence of Dynamic Flows
Posted: 10 Sep 2008 Last revised: 29 Feb 2012
Date Written: September 1, 2008
This paper analyzes competition between mutual funds in a multiple funds version of the model of Hugonnier and Kaniel. We characterize the set of equilibria for this delegated portfolio management game and show that there exists a unique Pareto optimal equilibrium. The main result of this paper shows that the funds cannot differentiate themselves through portfolio choice in the sense that they should offer the same risk/return tradeoff in equilibrium. This result brings theoretical support to the findings of recent empirical studies on the importance of media coverage and marketing in the mutual funds industry.
Keywords: portfolio management, asset-based management fees, mutual funds, dynamic flows, stochastic differential game
JEL Classification: G11, G12, C61
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