Idiosyncratic Risk and Mutual Fund Performance Persistence
Virginia Polytechnic Institute & State University
January 11, 2012
Midwest Finance Association 2013 Annual Meeting Paper
I examine the performance persistence in a total of 2,443 actively managed U.S. equity mutual funds over the period 1991-2010. After confirming the short-horizon persistence in fund relative performance, I show that this persistence is largely explained by idiosyncratic risk premium earned by past 'winner' funds and lost by past “loser” funds, while liquidity premium plays little role. Further, past winner funds do not exhibit higher realized idiosyncratic volatility at the portfolio level. Findings in this paper shed lights on a potentially winning strategy that, by picking up stocks that are 'undervalued' due to high idiosyncratic risk, mutual fund managers could gain better fund performance without delivering additional risk to investors.
Number of Pages in PDF File: 44
Keywords: mutual fund, performance persistence, idiosyncratic risk premium, liquidity premium
JEL Classification: G11, G12, G23
Date posted: December 20, 2011 ; Last revised: January 25, 2013
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