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RESEARCH PRODUCT

Performance evaluation of behavioral finance mutual funds : a comparison between behavioral finance mutual funds and conventional funds in the Norwegian fund market.

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Masteroppgave i økonomi og administrasjon - Universitetet i Agder 2011 Behavioral finance has been gathering more and more attention in the last decade, and both academia and practitioners have slowly starting to accept that psychology influence financial markets. Even though markets are irrational, old theories like CAPM, fundamental analysis and modern portfolio theory is still widely used. Given the amount of research regarding behavioral finance, is it impossible to give a complete summary of the entire field, hence, this study presents a brief review of the most relevant theories in order to give the reader an introduction to behavioral finance. With the increased attention to behavioral finance, mutual funds seems to incorporate different filters to capture irrational behavioral, and to capitalize on irrational investors. The objective of this study is to evaluate the performance of “behavioral” mutual funds, and to compare their performance to index funds and non-behavioral funds. However, none of the funds in the Norwegian market explicitly admits make investments based on behavioral finance. The selection of funds is therefore based on a detailed and comprehensive review of 67 prospectuses of Norwegian funds, published on the Morningstar and the fund manager’s website, is done in order to familiarize behavioral mutual funds in the Norwegian market. Empirical analysis is further applied, where a test for abnormal performance for six mutual funds identified as behavioral in the Norwegian market is conducted. Further analysis is also performed in order to recognize the strategy approach of the tested behavioral funds. The empirical results indicate that behavioral funds are able to outperform index funds and non-behavioral funds. The results further indicated that behavioral funds are tilted towards value investing, but fail to earn risk-adjusted abnormal returns. Given the difficulties of identifying behavioral funds in the Norwegian market, it is problematic to draw any strong conclusions from this study, but the results indicate that recognizing behavioral inefficiency may improve the performance of mutual funds. Keywords: behavioral finance, behavioral mutual funds, market inefficiency, fund performance analysis