Mutual Funds and Mispriced Stocks
56 Pages Posted: 18 May 2015 Last revised: 10 Jun 2018
Date Written: June 1, 2018
We propose a new measure of fund investment skill, Active Fund Overpricing (AFO), encapsulating the fund’s active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund’s investment opportunity set. We find strong evidence that high (low) AFO funds take active bets by deviating from their benchmark portfolios, and bet on the wrong (right) side of stock mispricing and consequently achieve inferior (superior) fund performance. The differential performance of low and high AFO fund deciles is large, ranging from 1.8% to 3.6% per annum, in our sample of actively managed mutual funds.
Keywords: Mutual funds; Managerial Skills; Mispricing
JEL Classification: G1, G2
Suggested Citation: Suggested Citation