Information Acquisition and Mutual Funds
30 Pages Posted: 13 Feb 2004
Date Written: June 24, 2005
We explain the size and the existence of the mutual fund industry by generalizing the standard competitive noisy rational expectations framework with endogenous information acquisition. Since informed agents optimally choose to open mutual funds in order to sell their private information, mutual funds are an endogenous feature of our equilibrium. Our model yields novel predictions on price informativeness, optimal fund fees, the equilibrium risk premium, and the size and competitiveness of the mutual fund industry. In particular, we show that a sufficiently competitive mutual fund sector yields more informative prices and a lower equity risk premium. Thus, the paper explicitly links the existence of mutual funds to equilibrium asset prices.
Keywords: mutual funds, markets for information
JEL Classification: D43, D82, G14
Suggested Citation: Suggested Citation