Studies On The Interrelationship Between Tournament Effect And Herd Effect On Mutual Fund Market

Mutual fund is a kind of important institutional investors in financial market where herd effect and tournament effects are typical phenomena.Identical to the conformity behavior in daily life,herd behavior in mutual fund market means that the managers give up their personal information and judgments about the market yet follow other peers' decisions to make investing choices.Meanwhile,tournament effect describes the phenomenon that fund manager's compensation relies on his relative,rather than absolute performance.Resorting to Tournament Theory,Reputation Theory and Risk Theory,this paper aims at comprehensively exploring the relationship between the two typical phenomena in fund market as well as study the behavior of fund managers in depth to propose measures on improving the effectiveness of financial market through literature,theoretical models and empirical tests.First of all,we introduced the backgrounds and conceptions of herd and tournament effect and review the relating literature,summarizing theories and methods for empirical study.Secondly,this paper discusses the relations in theoretical aspect.For one thing,referring to the previous studies and taking game theory as a tool,we prove our prediction by the first order conditions of an expected utility maximizing problem and a game where managers of different level tend to imitate their outstanding counterpart under the pressure from relative performance.For the other,we also discuss the possible changes that may take place in managerial performance,fund performance and remuneration arrangement,explaining the influence of fund tournament.Managers who are imitated may try to distinguish themselves from dumb ones by increasing the risk of their portfolios in order to gain higher return.Thirdly,we do three empirical tests for the conclusions presented in the theoretical part.In the first part,applying a new measurement of herd effect,we measured those of every period and every fund with holding data of the ordinary equity fund in China from 2014 to 2016.The results indicate that there exists intermediate level of herd effect in Chinese equity fund market.In the second part,we regress the herd level calculated in the previous part on factors of funds and managers.It turns out that managers' experience and their ranking are all significantly related with their funds' herd behavior level.In the last part,we add inter-period to OLS regression and the outcome can hardly support the views in the theoretical part.This outcome is understandable due to the uncertainty of investment results and flaws in data.Finally,we draw the theoretical and empirical conclusions and offer the following suggestions for different agents:a)strengthen information disclosure and avoid information asymmetry;b)modify the rules for industry access and enhance the managers' capacity;c)design rational standard for performance ranking and compensation incentive system.