Salience and Mutual Fund Investor Demand for Idiosyncratic Volatility

89 Pages Posted: 16 Jan 2016 Last revised: 11 May 2020

See all articles by Christopher P. Clifford

Christopher P. Clifford

University of Kentucky

Jon A. Fulkerson

University of Dayton

Russell Jame

University of Kentucky - Gatton College of Business and Economics

Bradford D. Jordan

University of Florida; University of Florida - Department of Finance, Insurance and Real Estate

Date Written: May 11, 2020

Abstract

We find that mutual fund investors are more likely to both purchase and redeem funds with high idiosyncratic volatility (IV). Investors’ tendency to purchase high IV funds is largely driven by high IV funds having more extreme returns, which increases the salience of the fund. Including flexible controls for extreme past returns over multiple horizons decreases the effect of IV on new investment, and experimental evidence corroborates that increasing the salience of extreme returns increases investor demand for IV. Demand for IV is higher among retail investors and funds with otherwise lower salience. Collectively, the evidence suggests that extreme returns attract investor
attention and contribute to investors’ risk seeking behavior when purchasing mutual funds.

Keywords: Idiosyncratic Volatility, Mutual Funds, Search Costs

JEL Classification: G10, G23

Suggested Citation

Clifford, Christopher P. and Fulkerson, Jon A. and Jame, Russell and Jordan, Bradford D., Salience and Mutual Fund Investor Demand for Idiosyncratic Volatility (May 11, 2020). Available at SSRN: https://ssrn.com/abstract=2715702 or http://dx.doi.org/10.2139/ssrn.2715702

Christopher P. Clifford

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States
859-257-3850 (Phone)

Jon A. Fulkerson

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Russell Jame (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States

HOME PAGE: http://russelljame.com

Bradford D. Jordan

University of Florida ( email )

Gainesville, FL 32611
United States

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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