What Do Fund Flows Reveal About Asset Pricing Models and Investor Sophistication?
68 Pages Posted: 22 Dec 2017 Last revised: 7 May 2019
Date Written: April 29, 2019
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: Suggested Citation