Market Frictions, Investor Sophistication, and Persistence in Mutual Fund Performance

46 Pages Posted: 16 May 2012 Last revised: 19 Dec 2017

See all articles by Ariadna Dumitrescu

Ariadna Dumitrescu

ESADE Business School

Javier Gil-Bazo

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: December 18, 2017

Abstract

We extend the model of Berk and Green (2004) to investigate the impact of two frictions, search costs and fi nancial 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 diversi fied 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

Dumitrescu, Ariadna and Gil-Bazo, Javier, Market Frictions, Investor Sophistication, and Persistence in Mutual Fund Performance (December 18, 2017). Available at SSRN: https://ssrn.com/abstract=2060067 or http://dx.doi.org/10.2139/ssrn.2060067

Ariadna Dumitrescu

ESADE Business School ( email )

Av. Pedralbes 60-62
Barcelona, 08034
Spain

Javier Gil-Bazo (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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