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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Zulehner, Christine / Schirle, Tammy


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1935-1682
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Relative Performance, Risk and Entry in the Mutual Fund Industry

Gyongyi Loranth1 / Emanuela Sciubba2

1Judge Business School, University of Cambridge,

2Birkbeck, University of London,

Citation Information: Topics in Economic Analysis & Policy. Volume 6, Issue 1, ISSN (Online) 1538-0653, DOI: 10.2202/1538-0653.1540, September 2006

Publication History

Published Online:
2006-09-12

Abstract

This paper analyses the impact of the emergence of new funds on the portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance within a dynamic model. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the on-going process of creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterises the mutual fund industry could explain why relative performance evaluation is widely in use.

Keywords: relative performance evaluation; fund management industry; ranking objectives; family of funds

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