Document Type


Date of Degree

Spring 2014

Degree Name

PhD (Doctor of Philosophy)

Degree In

Business Administration

First Advisor

Ashish Tiwari


In this dissertation, I address a range of topics in the context of mutual fund performance and high frequency trading.

The first chapter provides novel evidence on the role of ambiguity aversion in determining the response of mutual fund investors to historical fund performance information. It presents a model of ambiguity averse investors who receive multiple performance-based signals of uncertain precision about manager skill. A key implication of the model is that when investors receive multiple signals of uncertain quality, they place a greater weight on the worst signal. There is strong empirical support for this prediction in the data. Fund flows display significantly higher sensitivity to the worst performance measure even after controlling for fund performance at multiple horizons, performance volatility, flow-performance convexity, and a host of other relevant explanatory variables. This effect is particularly pronounced in the case of retail funds in contrast to institutional funds. The results suggest that fund investor behavior is best characterized as reflecting both Bayesian learning and ambiguity aversion.

The second chapter combines data on high frequency trading (HFT) activities of a randomly selected sample of 120 stocks and data on institutional trades, I find that HFT increases the trading costs of traditional institutional investors. An increase of one standard deviation in the intensity of HFT activities increases institutional execution shortfall costs by a third. Further analysis suggests that HFT represents an opportunistic and extra-expensive source of liquidity when demand and supply among institutional investors are imbalanced. Moreover, the impact on institutional trading costs is most pronounced when high frequency (HF) traders engage in directional strategies (e.g., momentum ignition and order anticipation). I perform various analyses to rule out an alternative explanation that HF traders are attracted to stocks that have high trading costs. First, HFT is most prevalent in liquid stocks. Second, the results are robust to controls for stable stock liquidity characteristics and events that might jointly affect HFT and trading costs. Third, an analysis of the HFT behavior around the temporary short selling ban in September 2008 highlights the opportunistic nature of liquidity provision by HF traders. Finally, Granger causality tests show that intensive HFT activity significantly contributes to institutional trading costs, but not vice versa.

The third chapter analyzes the implications of the tournament-like competition in the mutual fund industry using a framework that addresses the risk-taking incentives facing fund managers. The theoretical model presented in this chapter suggests that the increase in the \emph{activeness} of the interim loser manager's portfolio is directly related to the magnitude of the performance gap at the interim stage, and to the strength of the investor (cash flow) response to the relative performance rankings of the funds (i.e., the strength of the tournament effect). The empirical evidence based on quarterly Active Share data for a sample of domestic stock funds, is consistent with the key predictions of the model.


Ambiguity aversion, High frequency trading, Mutual fund


ix, 170 pages


Includes bibliographical references (pages 165-170).


Copyright 2014 Lin Tong