Estimating Short-run Persistence in Mutual Fund Performance
Jenke Ter Horst
Tilburg University - Center for Economic Research (CentER)
Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar
Review of Economics and Statistics, Vol. 82, pp. 646-655, November 2000
This paper analyzes the properties of a number of estimators that can be used to estimate short-run persistence in mutual fund returns. When data for different funds are pooled, it is advisable to correct for cross-sectional differences in expected returns. However, these adjustments may induce biases in the estimated persistence coefficients and thus lead to spurious persistence. Theoretical derivations, combined with a Monte Carlo study, show that these biases cannot be neglected for the samples that are typically used in applied work. The short-run persistence is estiamted in two samples of US open-end mutual funds using quarterly returns for 1987-1994. An important conclusion is that the results are quite sensitive to the estimation method that is employed.
Keywords: performance persistence, small sample bias
JEL Classification: G14, C22Accepted Paper Series
Date posted: January 4, 2006
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