Time-Varying Predictability in Mutual Fund Returns
43 Pages Posted: 21 Mar 2009 Last revised: 14 Jan 2012
Date Written: January 13, 2012
We provide novel evidence that mutual fund returns are predictable after periods of high market returns but not after periods of low market returns. The asymmetric conditional predictability in relative performance cannot be fully explained by time-varying differences in transaction costs, in style exposures, or in survival probabilities of funds. Performance predictability is more pronounced for funds catering to retail investors than for funds catering to institutional investors, suggesting that unsophisticated investors make systematic mistakes in their capital allocation decisions.
Keywords: Mutual Funds, Flows, Investor Rationality, Market Conditions
JEL Classification: G23, G11, G14
Suggested Citation: Suggested Citation