Mutual Fund Flows and Performance in Rational Markets

Posted: 2 Nov 2004

See all articles by Richard C. Green

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business

Jonathan Berk

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

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Abstract

We derive a parsimonious rational model of active portfolio management that reproduces many regularities widely regarded as anomalous. Fund flows rationally respond to past performance in the model even though performance is not persistent and investments with active managers do not outperform passive benchmarks on average. The lack of persistence in returns does not imply that differential ability across managers is nonexistent or unrewarded or that gathering information about performance is socially wasteful. The model can quantitatively reproduce many salient features in the data. The flow-performance relationship is consistent with high average levels of skills and considerable heterogeneity across managers.

Suggested Citation

Green, Richard C. and Berk, Jonathan B., Mutual Fund Flows and Performance in Rational Markets. Journal of Political Economy, Vol. 112, pp. 1269-1295, December 2004. Available at SSRN: https://ssrn.com/abstract=612465

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business ( email )

315B Schenley Park
Pittsburgh, PA 15213-3890
United States
412-268-2302 (Phone)
412-268-7064 (Fax)

Jonathan B. Berk (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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