Do actively managed mutual funds exploit stock market mispricing? |
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Institution: | 1. Department of Finance, College of Business, Florida International University, Miami, FL 33199, USA;2. Department of Finance, Monte Ahuja College of Business, Cleveland State University, Cleveland, OH 44115, USA;3. Department of Economics and Finance, Palumbo-Donahue School of Business, Duquesne University, Pittsburgh, PA 15282, USA |
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Abstract: | Constructing a proxy for mispricing with 15 well-known stock market anomalies, we examine whether actively managed mutual funds exploit mispricing. We find that, in the aggregate, mutual funds overweight overvalued stocks and underweight undervalued stocks relative to a passive benchmark, and this tendency is explained by the ill-motivated trades of agency-prone fund managers. In addition, we find that mutual funds with the highest weights in undervalued stocks outperform those with the highest weights in overvalued stocks by an annualized three-factor alpha of 2.12% (t = 2.38), implying that slanting portfolios based on our proxy helps mutual funds improve performance. |
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Keywords: | Mutual funds Managerial skill Anomalies Mispricing G10 G11 G20 G23 |
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