Revealed Preferences of Mutual Fund Investors in Good and Bad Times

48 Pages Posted: 30 Apr 2019

See all articles by Tianyu Wang

Tianyu Wang

School of Economics and Management, Tsinghua University

Date Written: December 12, 2017

Abstract

Recent works demonstrate that the Capital Asset Pricing Model (CAPM) alpha is most likely used by investors as the performance measure in mutual fund. I explore the validity of this claim in different market conditions and show that the CAPM is only preferred by investors in good times, but it fails against the simple model (fund return minus market return) in bad times. Fund characteristics and investor sophistication cannot explain the pattern. The time-varying fund flow sensitivity to different fund performance components matters. Decomposing the fund return measured by this simple model into the CAPM alpha and a component proxy for market timing performance, I find that the fund flow sensitivity to market timing performance is countercyclical.

Keywords: CAPM, Mutual Fund, Market Conditions, Market Timing

Suggested Citation

Wang, Tianyu, Revealed Preferences of Mutual Fund Investors in Good and Bad Times (December 12, 2017). Available at SSRN: https://ssrn.com/abstract=3367781 or http://dx.doi.org/10.2139/ssrn.3367781

Tianyu Wang (Contact Author)

School of Economics and Management, Tsinghua University ( email )

Shuangqing Road 30
Haidian District
Beijing, Beijing SW7 2AZ
China

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