Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry

52 Pages Posted: 8 Jun 2009 Last revised: 3 Feb 2023

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Shimon Kogan

Reichman University - Arison School of Business; University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Date Written: June 2009

Abstract

We provide new empirical evidence suggesting that the marginal investor in mutual funds behaves differently across market conditions. If the marginal investor allocates capital across mutual funds rationally, then the relative performance of funds should be unpredictable. We find however that relative fund performance is predictable after periods of high market returns but not after periods of low market returns. The asymmetric predictability in performance we document cannot be explained by time-varying differences in transaction costs or style exposures between funds, or by sample selection. Consistent with the hypothesis that the asymmetric predictability in performance may be driven by unsophisticated investors' mistakes when allocating capital, we document that performance predictability is more pronounced for funds that cater to retail investors than for funds that cater to institutional investors.

Suggested Citation

Glode, Vincent and Hollifield, Burton and Kacperczyk, Marcin T. and Kogan, Shimon, Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry (June 2009). NBER Working Paper No. w15038, Available at SSRN: https://ssrn.com/abstract=1415181

Vincent Glode

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://www.vincentglode.com

Burton Hollifield

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

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Marcin T. Kacperczyk (Contact Author)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Shimon Kogan

Reichman University - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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