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A simple model of a money-management market with rational and extrapolative investors

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
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.ucl.ac.uk/id/eprint/10100836
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