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
Date Written: February 19, 2016
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: Suggested Citation