Time Effects, Extreme Flows and Capacity Constraints
In the previous chapter 7, the empirical evidence indicates that fund flows and manager changes are important equilibrium mechanisms explaining mean reversion in mutual fund performance. In this chapter, these effects are analyzed in more detail, first, with respect to the relevant time dimension and, second, with respect to the relationship between the magnitude of fund flows and the associated performance reversal. Both approaches can be interpreted as an analysis of what effect a larger difference in cumulated fund flows has on subsequent performance. This larger difference, however, can be achieved by two ways: either the time interval over which fund flows are accumulated is extended to a longer period or the sorting into subgroups is based on more extreme split points by setting a stricter condition for the inclusion of funds in the high- or low-inflow subgroups.
KeywordsAbnormal Return Capacity Constraint Fund Performance Formation Period Split Point
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