Why mutual funds “underperform” |
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Authors: | Vincent Glode |
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Institution: | The Wharton School, University of Pennsylvania, Philadelphia, PA 19104, USA |
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Abstract: | I propose a parsimonious model that reproduces the negative risk-adjusted performance of actively managed equity mutual funds. In the model, a fund manager can generate state-dependent active returns at a disutility. Negative expected performance and mutual fund investing simultaneously arise in equilibrium because the active return the fund manager generates covaries positively with a component of the pricing kernel that the performance measure omits, consistent with recent empirical evidence. Using data on U.S. funds, I also document new empirical evidence consistent with the model's cross-sectional implications. |
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Keywords: | Mutual fund Performance Business cycle Investment Pricing kernel |
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