Economic Policy Uncertainty and Learning: Theory and Evidence on Mutual Funds

51 Pages Posted: 25 Feb 2021

See all articles by Erica Xuewei Jiang

Erica Xuewei Jiang

University of Southern California

Laura T. Starks

University of Texas at Austin - Department of Finance

Sophia Sun

AQR Capital Management

Date Written: March 9, 2016

Abstract

Using the mutual fund industry as a laboratory, we demonstrate theoretically and empirically that economic policy uncertainty an affect investment decisions through an information rather than real options channel. Specifically, we find that fund flow-performance sensitivity decreases in uncertainty and does so more strongly for funds with shorter track records. The evidence supports the predictions of our model, most notably that investor learning about manager ability weakens when uncertainty increases. The results have implications for inefficient capital allocation during periods of higher uncertainty due to the resultant sluggish learning process.

Keywords: uncertainty, policy, learning, flow-performance sensitivity

JEL Classification: D82, D83, D84, G11, G23, G28

Suggested Citation

Jiang, Erica Xuewei and Starks, Laura T. and Sun, Sophia, Economic Policy Uncertainty and Learning: Theory and Evidence on Mutual Funds (March 9, 2016). Available at SSRN: https://ssrn.com/abstract=2745711 or http://dx.doi.org/10.2139/ssrn.2745711

Erica Xuewei Jiang

University of Southern California ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Laura T. Starks (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

Sophia Sun

AQR Capital Management ( email )

Two Greenwich Plaza
Greenwich, CT 06830
United States

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