Mutual Funds and Mispriced Stocks

56 Pages Posted: 18 May 2015 Last revised: 10 Jun 2018

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Si Cheng

Chinese University of Hong Kong - Department of Finance

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Date Written: June 1, 2018

Abstract

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

Avramov, Doron and Cheng, Si and Hameed, Allaudeen, Mutual Funds and Mispriced Stocks (June 1, 2018). Available at SSRN: https://ssrn.com/abstract=2607002 or http://dx.doi.org/10.2139/ssrn.2607002

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Si Cheng (Contact Author)

Chinese University of Hong Kong - Department of Finance ( email )

12/F, Cheng Yu Tung Building
No.12, Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.bschool.cuhk.edu.hk/index.php/faculty-staff/show-alltest?pid=496&sid=3939:Cheng-Si

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.bschool.nus.edu.sg/staff_profile/cv.asp?ID=3

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