Information Acquisition and Mutual Funds

30 Pages Posted: 13 Feb 2004

See all articles by Diego Garcia

Diego Garcia

University of Colorado at Boulder - Leeds School of Business; University of North Carolina (UNC) at Chapel Hill - Finance Area

Joel M. Vanden

Pennsylvania State University - Smeal College of Business

Date Written: June 24, 2005

Abstract

We explain the size and the existence of the mutual fund industry by generalizing the standard competitive noisy rational expectations framework with endogenous information acquisition. Since informed agents optimally choose to open mutual funds in order to sell their private information, mutual funds are an endogenous feature of our equilibrium. Our model yields novel predictions on price informativeness, optimal fund fees, the equilibrium risk premium, and the size and competitiveness of the mutual fund industry. In particular, we show that a sufficiently competitive mutual fund sector yields more informative prices and a lower equity risk premium. Thus, the paper explicitly links the existence of mutual funds to equilibrium asset prices.

Keywords: mutual funds, markets for information

JEL Classification: D43, D82, G14

Suggested Citation

Garcia, Diego and Vanden, Joel M., Information Acquisition and Mutual Funds (June 24, 2005). Tuck Business School Working Paper No. 2004-02; EFA 2004 Maastricht Meetings Paper No. 4332. Available at SSRN: https://ssrn.com/abstract=488885 or http://dx.doi.org/10.2139/ssrn.488885

Diego Garcia (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Joel M. Vanden

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

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