Dynamic Excess Autocorrelation and Mutual Fund Performance

Dong, Xi; Massa, Massimo

doi:10.2139/ssrn.2232397

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Dynamic Excess Autocorrelation and Mutual Fund Performance

AFA 2014 Philadelphia Meetings Paper

86 Pages Posted: 13 Mar 2013 Last revised: 31 Mar 2020

See all articles by Xi Dong

Massimo Massa

INSEAD - Finance

Date Written: January 1, 2014

Abstract

Positive return correlation signals slowly-diffusing information. Short sell-constrained institutions are mainly informed in their buy trades. Building on these facts, we identify informed investors ex ante by focusing on mutual funds. We propose a measure of the dynamic excess autocorrelation (DEA) of fund portfolios. High-DEA funds persistently outperform by 3.5% annually. Our framework shows that the DEA identifies informed managers who dynamically rebalance to buy portfolios with slowly-diffusing positive information, which are thus positively autocorrelated and subsequently outperform. We support such intuition with high- and low-frequency evidence. The DEA performance predictability stems from a novel portfolio-level, cross-stock linkage.

Keywords: Mutual Fund Performance, Serial Correlation, Informed Traders

JEL Classification: G11, G14, G23

Suggested Citation: Suggested Citation

Dong, Xi and Massa, Massimo, Dynamic Excess Autocorrelation and Mutual Fund Performance (January 1, 2014). AFA 2014 Philadelphia Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2232397 or http://dx.doi.org/10.2139/ssrn.2232397