Familiarity and competition: the case of mutual funds

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• dc.contributor.author Dumitrescu, Ariadnaca
• dc.contributor.author Gil-Bazo, Javierca
• dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
• dc.date.accessioned 2017-07-26T10:50:11Z
• dc.date.available 2017-07-26T10:50:11Z
• dc.date.issued 2015-03-01
• dc.date.modified 2017-07-23T02:16:52Z
• dc.description.abstract We build a model of mutual fund competition in which a fraction of investors ("unsophisticated") exhibit a preference for familiarity. Funds differ both in their quality and their visibility: While unsophisticated investors have varying degrees of familiarity with respect to more visible funds, they avoid low-visibility funds altogether. In equilibrium, bad low-visibility funds are driven out of the market of sophisticated investors by good low-visibility funds. High-visibility funds do not engage in competition for sophisticated investors either, and choose instead, to cater to unsophisticated investors. If familiarity bias is high enough, bad funds survive competition from higher quality funds despite offering lower after-fee performance. Our model can thus shed light on the persistence of underperforming funds. But it also delivers a completely new prediction: Persistent differences in performance should be observed among more visible funds but not in the more competitive low-visibility segment of the market. Using data on US domestic equity funds, we nd strong evidence supporting this prediction. While performance differences survive at least one year for the whole sample, they vanish within the year for low-visibility funds. These results are not explained by differences in persistence due to fund size or investment category. The evidence also suggests that differences in persistence are not the consequence of other forms of segmentation on the basis of investor type (retail or institutional) or the distribution channel.
• dc.format.mimetype application/pdfca
• dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=1474
• dc.identifier.uri http://hdl.handle.net/10230/23365
• dc.language.iso eng
• dc.relation.ispartofseries Economics and Business Working Papers Series; 1474
• dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
• dc.subject.keyword familiarity bias; competition; mutual funds; performance persistence.
• dc.subject.keyword Finance and Accounting
• dc.title Familiarity and competition: the case of mutual fundsca
• dc.type info:eu-repo/semantics/workingPaper