Spiegler, R;
(2020)
A simple model of a money-management market with rational and extrapolative investors.
European Economic Review
, 127
, Article 103488. 10.1016/j.euroecorev.2020.103488.
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Abstract
I analyze a simple model of competition in fees among mutual funds. The funds are vertically differentiated in terms of the expected return they can generate for investors. Following Berk and Green (2004), I assume that a fund’s net return is decreasing in the amount of capital it manages, and that there is an infinite supply of capital by rational investors. Unlike the Berk-Green model, I assume there is also a finite supply of capital by non-rational investors who naively chase recent net returns. Investor behavior and the funds’ fee profile induce a long-run average amount of managed capital for each fund. I analyze Nash equilibrium in the game played by the funds, focusing on the implications of fund skill on fees, capital flows and net performance.
| Type: | Article |
|---|---|
| Title: | A simple model of a money-management market with rational and extrapolative investors |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1016/j.euroecorev.2020.103488 |
| Publisher version: | https://doi.org/10.1016/j.euroecorev.2020.103488 |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Mutual funds; Extrapolative expectations; Smart money; Dumb money; Flow-performance relation; Behavioral industrial organization; Quacks |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL SLASH UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10100836 |
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