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Are behavioural finance equity funds a superior investment? A note on fund performance and market efficiency

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Abstract

This article compares the performance of behavioural finance funds with the performance of the market and that of matched mutual funds across the major regions of the world from 1990 to 2010. Performance is measured raw and risk-adjusted. The empirical evidence suggests that behavioural finance funds neither outperform nor underperform the market or matched actively managed mutual funds. Overall, the empirical findings vary strongly with the set-up of the investigation. We conclude that either stock markets are more efficient, or fund management is worse, than behavioural finance funds advertise. This is consistent with other studies’ results.

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Notes

  1. A note of caution: Testing for regularities in stock returns implicitly also tests the assumed asset pricing model (Malkiel, 1995).

  2. We do not distinguish between individual and institutional investors as the fund management is, by definition, institutional. In this article, we investigate institutional fund performance independently of the origin of the funds that are being invested.

  3. We call these ‘dead funds’. Note that the number of behavioural finance funds that died in the recent past could be viewed as an indication of poor performance.

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Acknowledgements

We would like to thank the Editor of the Journal of Asset Management, Dr Stephen Satchell, and an anonymous referee for valuable suggestions. We are also indebted to the EBS Business School for access to DataStream data.

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1obtained her Master’s Degree (German Diplom) in Economics from Göttingen University and her PhD in Finance from Münster University, both in Germany. As an undergraduate student, she studied economics and statistics at the University of California, Los Angeles (UCLA) on a 1-year DAAD scholarship. She spent 4 years working in central banking, first at the Deutsche Bundesbank in Frankfurt, and afterwards for the Bank of England in London. She has been a banking and finance Professor at Jade University, Wilhelmshaven, Germany since January 2012.

2obtained his Master’s Degree (German Diplom) in Economics from Kiel University and his PhD in Business Administation and Banking from Mannheim University, where he also finalized his habilitation in 2000. After 2 years at the Institute for Mergers & Acquisitions of Witten/Herdecke University, he spent 6 years at the European Business School. In 2008, he was appointed as the Chair of Corporate Finance at Darmstadt University of Technology. He is a member of the Scientific Advisory Board of DDV – Deutscher Derivate Verband (the German Derivatives Association).

3obtained his Master of Science in Business Administration with Mechanical Engineering from the Technical University of Darmstadt, Germany. During his studies, he was also awarded the Diplôme d'Etudes Supérieures from the Ecole Centrale de Lyon, France. After work experiences with Daimler Chrysler, Renault, Siemens Management Consulting and Deutsche Bank, he joined the Financial Institutions Group of Bank of America Merrill Lynch in 2011, where he has been involved in a number of mergers & acquisitions and capital raising assignments for some of the leading global insurance companies.

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Goodfellow, C., Schiereck, D. & Wippler, S. Are behavioural finance equity funds a superior investment? A note on fund performance and market efficiency. J Asset Manag 14, 111–119 (2013). https://doi.org/10.1057/jam.2013.9

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