Estimating the Incentives and Sensitivities in Taiwan Mutual Funds: An Application of the Generalized Maximum Entropy Approach

This paper examines the sensitivities of category equity funds and the incentives offered to fund managers when their remuneration is based upon the market value of the assets they manage. An almost ideal demand system model is applied as a framework to analyze all categories with different risk-return profiles, and a generalized maximum entropy approach is employed to empirically estimate the share equations for six types of category equity funds using times series data from Taiwan. Empirical evidence shows that investors are highly sensitive to the influence of changes in budget expenditure and prices, and an increase in expenditure is expected to have a positive impact on asset allocation expenditure. The relatively positive incentives also help to explain the adoption of the asset-based scheme.