Information acquisition and mutual funds

Diego García, Joel M. Vanden

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

We study the formation of mutual funds by generalizing the standard competitive noisy rational expectations framework. In our model, informed agents set up mutual funds as a means of selling their private information to uninformed agents. We study the case of imperfect competition among fund managers, where uninformed agents invest simultaneously in multiple mutual funds. The size of the assets under management in the mutual fund industry is determined by endogenizing the agents' information acquisition decisions. Our model yields novel predictions on the informativeness of price, the optimal fees of mutual funds, and the equilibrium risk premium. In particular, we show that a sufficiently competitive mutual fund sector yields more informative prices and a lower equity risk premium.

Original languageEnglish (US)
Pages (from-to)1965-1995
Number of pages31
JournalJournal of Economic Theory
Volume144
Issue number5
DOIs
StatePublished - Sep 1 2009

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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