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Do Mutual Fund Investors Overweight the Probability of Extreme Payoffs in the Return Distribution?

Published online by Cambridge University Press:  08 October 2018

Ferhat Akbas  and
Egemen Genc
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Abstract

We investigate the role of extreme positive payoffs in the distribution of monthly fund returns in investors’ mutual fund preferences. We document a positive and significant relationship between the maximum style-adjusted monthly return (MAX) and future fund flows. The relationship is robust to controlling for average performance, volatility, skewness, and various other fund characteristics. Our findings are consistent with the notion that fund investors overweight the probability of high payoff states in the past return distribution. We further show that MAX is not a useful predictor of future performance and that an increase in a fund’s visibility does not explain our findings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 1 , February 2020 , pp. 223 - 261
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Jennifer Conrad (the editor) and Florian Weigert (the referee) for their excellent comments that greatly improved the article. We also thank Will Armstrong, John Chalmers, Mathijs Cosemans, Diane Del Guercio, Ro Gutierrez, Yigitcan Karabulut, Paul Koch, Felix Meschke, and seminar participants at Rotterdam School of Management, Norwegian School of Economics, Ozyegin University, and the University of Kansas for helpful comments. Any errors are our own. An earlier version of this article was circulated under the title “Extreme Daily Returns and Fund Flows.”

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