Extreme Daily Fund Returns and Fund Flows
Speaker
Abstract
| I investigate the role of recent extreme positive returns on future fund flows using maximum style-adjusted daily returns (MAX) over the previous month. I document a positive and significant relation between MAX and fund flows. The results are robust to controls for fund performance, fund size, age, turnover, fund fees, volatility, and skewness of fund returns. Of particular interest, the positive relation between MAX and fund flows exists only in retail funds. Moreover, MAX is persistent from one month to the next, but MAX-based investment strategies are associated with lower risk-adjusted returns than investors could have achieved in otherwise similar funds. Overall, my analysis suggests that mutual fund investors are attracted to maximum style-adjusted daily returns (MAX), which is in line with the theoretical arguments that investors exhibit a preference to extreme payoffs. They are successful in achieving a lottery-like return profile, but this strategy is costly in terms of expected returns. |
| Contact information: |
| Myra Lissenberg |
