Investor Learning and the Aggregate Allocation of Capital to Active Management

58 Pages Posted: 20 Jul 2022

See all articles by Jeong Ho (John) Kim

Jeong Ho (John) Kim

Florida State University - Department of Finance

Date Written: June 15, 2022

Abstract

We estimate a model in which Bayesian investors learn about parameters governing mutual fund performance in real time and competitively allocate capital to funds, conditional on their current beliefs. The model-implied aggregate allocation of capital in response to the history of observed returns closely approximates the observed allocation over time. Key to this result is that investors learn not only about differential ability across funds but also about the nature of returns to scale---how a fund's performance depends on its size versus the size of its competition. Overall, our results support that mutual fund investors are not naive.

Keywords: Active Management, Returns to Scale, Learning, Mutual Funds, Bayesian Methods

Suggested Citation

Kim, Jeong Ho, Investor Learning and the Aggregate Allocation of Capital to Active Management (June 15, 2022). Available at SSRN: https://ssrn.com/abstract=4158104 or http://dx.doi.org/10.2139/ssrn.4158104

Jeong Ho Kim (Contact Author)

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States

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