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Student Number 91428003
Author Kuan-Cheng Ko(_a)
Author's Email Address No Public.
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Department Finance
Year 2003
Semester 2
Degree Master
Type of Document Master's Thesis
Language English
Title Prospect Theory and the Risk-Return Relationship: Evidence from Mutual Funds
Date of Defense 2004-06-23
Page Count 36
Keyword
  • mutual fund performance
  • prospect theory
  • risk-adjusted behavior
  • risk-return relationship
  • Abstract Previous studies had examined the relationship between fund performance and risk-adjusted behavior on the viewpoint of agency perspective. We propose several hypotheses derived from prospect theory to test if fund managers' risk attitudes are affected by their past performance. Based on a sample of U.S. equity funds over the period from 1992 to 2002, the empirical results show that fund managers exhibit risk-averse (risk-taking) behavior only when they substantially outperformed (underperformed) other funds. In addition, such a phenomenon is more significant when the market return is used as the reference point. Further investigation reveals that winner funds exhibit style-timing ability by holding winner stocks, whereas the loser funds exhibit style-timing ability by holding value stocks.
    Table of Content Abstract                                    i
    Chinese Abstract                               ii
    Acknowledgements                               iv
    Contents                                    v
    List of Figures                               vii
    List of Tables                               viii
    1 Introduction                                 1
    2 Data                                     5
    3 Hypotheses and methodology                          7
    3.1 The hypotheses ............................................................7
    3.2 Methodology ...............................................................8
    3.2.1 Risk-return trade-off relationship ......................................8
    3.2.2 Cross-sectional variation ..............................................10
    3.2.3 Buy-and-hold returns ...................................................11
    4 Empirical results                              12
    4.1 For the overall period ...................................................12
    4.2 Classifying funds into categories according to investment styles .........14
    4.3 On the extreme funds .....................................................17
    5 Post-performance and fund style analysis                  24
    5.1 Post-performance analysis ................................................24
    5.2 Fund style analysis ......................................................25
    5.3 Style timing analysis ....................................................28
    5.4 Shifts in fund styles ....................................................29
    6 A comparison with the tournament: a robustness check            31
    7 Conclusion                                 33
    Bibliography                                 35
    Reference [1] Brown, K., W. Harlow and L. Starks, 1996, Of tournaments and temptations: an analysis of managerial incentives in the mutual fund industry, Journal of Finance 51, 85-110.
    [2] Edwards, Kimberley D., 1995, Prospect theory: A literature review, International Review of Financial Analysis 5, 19-38.
    [3] Chan, L. K. C., H-L. Chen, and J. Lakonishok, 2002, On mutual fund investment styles, Review of Financial Studies 15, 1407-1437.
    [4] Chevalier, Judith, and Ellison, Glenn, 1997, Risk taking by mutual funds as a response to incentives, Journal of Political Economy 105, 1167-1200.
    [5] Fiegenbaum, A., 1990, Prospect theory and the risk-return association: an empirical examination in 85 industries, Journal of Economic Behavior and Organization 14, 187-203.
    [6] Fiegenbaum, A., H. Tomas 1988, Attitudes toward risk and risk-return paradox: prospect theory explanations, Academy of Management Journal 31, 85-106.
    [7] Golec, J., 1992, Empirical tests of a principal-agent model of the investor-investment advisor relationship, Journal of Financial and Quantitative Analysis 27, 81-96.
    [8] Grinblatt, M., and S. Titman, 1989, Adverse risk incentives and the design of performance based contracts, Management Science 51, 43-52.
    [9] Henriksson, R. D., and R. C. Merton, 1981, On market timing and investment performance. II. statistical procedures for evaluating forecasting skills, Journal of Business 54, 513-534.
    [10] Jegers, Marc, Prospect theory and the risk-return relation: Some Belgian evidence, Academy of Management Journal 34, 215-225.
    [11] Kahneman, D. and A. Tversky, 1979, Prospect theory: An analysis of decision under risk, Econometrica 47, 263-291.
    [12] March, James G. and Zur Shapira, 1987, Managerial perspectives on risk and risk taking, 1987, Management Science 33, 1404-1418.
    [13] Sinha, Tapen, 1994, Prospect theory and the risk return association: Another look, Journal of Economic Behavior and Organization 24, 225-231.
    [14] Sirri, E. and P. Tufano, 1993, Buying and selling mutual funds: Flows, performance, fees, and services, Manuscript. Boston: Harvard Business School.
    [15] Wiseman, Robert M. and Philip Bromiley, 1991, Risk-return associations: Paradox or artifact? An empirically tested explanation, Strategic Management Journal 12, 231-241.
    Advisor
  • Pin-Huang Chou(P)
  • Files
  • 91428003.pdf
  • approve in 2 years
    Date of Submission 2004-07-05

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