Mutual Funds in Equilibrium
29 Pages Posted: 10 Feb 2017 Last revised: 18 Jul 2017
Date Written: February 9, 2017
Historically, the literature on money management has not consistently applied the rational expectations equilibrium concept. We explain why and summarize developments in the money management literature that do apply this concept correctly. We demonstrate that the rational expectations equilibrium approximates the observed equilibrium in the money management space at least as well as it does in the stock market. The puzzles that have plagued the earlier literature are a consequence of failing to apply the equilibrium concept correctly. Recent work reveals that there is little support for the common conclusion that, as a group, investors in the money management space are naive and that mutual fund managers are charlatans. Even today, equilibrium thinking is not nearly as prevalent in mutual fund research as it is in the rest of asset pricing. This state of play provides a multitude of opportunities for future research in the area.
Keywords: Mutual Funds, Equilibrium, Alpha, Size, Rational Expectations
JEL Classification: G23, G20, G11, J31, J24
Suggested Citation: Suggested Citation