What Do Fund Flows Reveal About Asset Pricing Models and Investor Sophistication?

68 Pages Posted: 22 Dec 2017 Last revised: 7 May 2019

See all articles by Narasimhan Jegadeesh

Narasimhan Jegadeesh

Emory University - Department of Finance

Chandra Sekhar Mangipudi

Emory University

Date Written: April 29, 2019

Abstract

Recent literature compares the relation between fund flows and various multifactor model alphas to test asset pricing models and investor sophistication. We show that such comparisons are not valid tests of asset pricing models. Also, our empirical results indicate that the true asset pricing model has a negligible effect on flow-alpha relations. The literature also tests investor sophistication with such comparisons and uses alphas with respect to a multifactor model with all factors as the benchmark. But we find that the appropriate benchmark for our mutual fund sample does not include all factors because of measurement errors in factor betas.

Keywords: Asset Pricing Models, Mutual Funds, Fund Flows, Investor Sophistication, Multifactor Models

JEL Classification: G00, G02, G11, G12, G20

Suggested Citation

Jegadeesh, Narasimhan and Mangipudi, Chandra Sekhar, What Do Fund Flows Reveal About Asset Pricing Models and Investor Sophistication? (April 29, 2019). Available at SSRN: https://ssrn.com/abstract=3090541 or http://dx.doi.org/10.2139/ssrn.3090541

Narasimhan Jegadeesh (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

Chandra Sekhar Mangipudi

Emory University ( email )

1300 Clifton Road
Atlanta
Atlanta, GA Clifton Road 30322
United States

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