Do Mutual Fund Investors Overweight the Probability of Extreme Payoffs in the Return Distribution?

87 Pages Posted: 19 Feb 2016 Last revised: 13 Nov 2018

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago

Egemen Genc

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Date Written: February 19, 2016

Abstract

We investigate the role of extreme positive payoffs in the distribution of monthly fund returns in investors’ mutual fund preferences. We document a positive and significant relationship between the maximum style-adjusted monthly return (MAX) and future fund flows. The relationship is robust to controlling for average performance, volatility, skewness, and various other fund characteristics. Our findings are consistent with the notion that fund investors overweight the probability of high payoff states in the past return distribution. We further show that MAX is not a useful predictor of future performance and increase in a fund’s visibility does not explain our findings.

Keywords: mutual funds, fund flows, extreme positive payoffs, lottery stocks

JEL Classification: G11

Suggested Citation

Akbas, Ferhat and Genc, Egemen, Do Mutual Fund Investors Overweight the Probability of Extreme Payoffs in the Return Distribution? (February 19, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2734743 or http://dx.doi.org/10.2139/ssrn.2734743

Ferhat Akbas

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60076
United States

Egemen Genc (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

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