The cumulative prospect theory and fund flows in emerging markets

Abstract

This study is the first to examine the efficacy of the Cumulative Prospect Theory value of the past return (CPTV) to explain fund flow in emerging markets funds by considering the impact of fund managers’ characteristics and behavioural biases on fund investors’ investment decisions. Besides, this study also investigates the impact of fund investors’ ability to identify fund managers’ skills. The findings suggest that CPTV has a significant and positive association with subsequent fund flow and emerging market funds’ performance. Notably, the study documents a negative relationship between fund flow and fund size and also highlights that newer funds generate greater fund flows. Furthermore, the findings indicate that investors investing in emerging market funds tend to behave differently, allocate money for alpha, and avoid giving distorted income for factor-related returns to fund managers. The results demonstrate that managers’ skill and portfolio concentration decision affects fund flow and CPTV relationships. The findings illustrate that fund managers who concentrate their portfolio and invest in high CPTV stocks tend to generate higher fund flow than their diversified counterparts.