Mutual Funds in Equilibrium

29 Pages Posted: 10 Feb 2017 Last revised: 18 Jul 2017

See all articles by Jonathan Berk

Jonathan Berk

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 9, 2017

Abstract

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

Berk, Jonathan B. and van Binsbergen, Jules H., Mutual Funds in Equilibrium (February 9, 2017). Stanford University Graduate School of Business Research Paper No. 17-13. Available at SSRN: https://ssrn.com/abstract=2914669 or http://dx.doi.org/10.2139/ssrn.2914669

Jonathan B. Berk

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jules H. Van Binsbergen (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

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