Dynamic Return-Based Classification of European Mutual Funds

46 Pages Posted: 15 Aug 2015

See all articles by Philipp Gerlach

Philipp Gerlach

Goethe University Frankfurt

Raimond Maurer

Goethe University Frankfurt - Finance Department

Date Written: April 30, 2015

Abstract

In this study, we analyze the monthly fund migrations in a return-based classification scheme for European mutual funds. Accounting for the time-varying commonalities in returns, we derive a classification scheme consisting of four layers with two, six, 15, and 20 groups respectively. In the two-group solution fund migrations are low while in the classification with six groups migrations are low during normal times but high during the financial crisis for stock funds and during the debt crisis for bond funds. Fund migrations in the classification with 15 and 20 groups are high overall. In line with prior research, we confirm that return-based classifications are better able to explain the cross-sectional differences in mutual fund returns than existing industry classifications based on portfolio holdings and self-declared investment objectives.

Keywords: Fund Migrations, Hierarchical K-Means, Mutual Funds, Return-Based Classification, Transition Probabilities

JEL Classification: C63, G23

Suggested Citation

Gerlach, Philipp and Maurer, Raimond, Dynamic Return-Based Classification of European Mutual Funds (April 30, 2015). Available at SSRN: https://ssrn.com/abstract=2643495 or http://dx.doi.org/10.2139/ssrn.2643495

Philipp Gerlach (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt, 60323
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt, 60323
Germany

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