Abstract
We empirically investigate the role of prospect theory in explaining mutual fund performance. Using a comprehensive open-ended equity fund dataset in China covering a period from 2004 to 2017, we construct a fund-level prospect theory value (TK) measure and find that it positively and significantly predicts future fund performance. This predictive power cannot be explained by existing risk factors or other fund characteristics. High TK funds also attract higher net fund inflows. Both performance persistence and price impact contribute to the fund performance predictability. Comprehensive robustness checks support our main findings.
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