Market Frictions, Investor Sophistication, and Persistence in Mutual Fund Performance
46 Pages Posted: 16 May 2012 Last revised: 19 Dec 2017
Date Written: December 18, 2017
We extend the model of Berk and Green (2004) to investigate the impact of two frictions, search costs and financial constraints, on mutual fund performance. Our model predicts the survival of underperforming funds and delivers two new predictions: 1) differences in performance across funds are likely to persist; and 2) mutual funds targeted to less sophisticated investors should exhibit higher dispersion in expected performance. Using data on U.S. domestic diversified equity mutual funds we find empirical support for these predictions.
Keywords: mutual fund performance persistence; market frictions; investor sophistication
JEL Classification: G2; G23
Suggested Citation: Suggested Citation