Abstract
Recent evidence indicates that market model alphas are stronger predictors of mutual fund flows than alphas with other models. Berk and van Binsbergen (2016) claim that this evidence indicates CAPM is the best asset pricing model but Barber, Huang and Odean (2016) (BHO) claim it is evidence against investor sophistication. We evaluate the merits of these mutually exclusive interpretations. We show that no tenable inference about the true asset pricing model can be drawn from this evidence. The rejection of investor sophistication hypothesis is tenable, but the appropriate benchmark to judge sophistication is different from the one that BHO use.
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