Origins of Mutual Fund Skill: Market versus Accounting Based Asset Pricing Anomalies

65 Pages Posted: 24 Jan 2021 Last revised: 26 May 2023

See all articles by Charlotte Christiansen

Charlotte Christiansen

Aarhus University - CREATES

Ran Xing

Stockholm University - Stockholm Business School; Aarhus University; Swedish House of Finance

Yue Xu

Durham University

Date Written: March 29, 2023

Abstract

This paper decomposes the active U.S. equity mutual funds' value added using 234 public asset pricing anomalies. We find that mutual funds on average lose substantial value through their high exposure to the short legs of accounting anomalies (e.g., investment, profitability, and accrual). This high exposure is largely due to the high correlation between the short legs of accounting anomalies and the long legs of anomalies based on market information (e.g., momentum, liquidity risk, and seasonality). Mutual funds fail in keeping a low exposure to the short legs of accounting anomalies while profiting from a high exposure to the long legs of anomalies based on market information. Further evidence suggests that the negative exposure to accounting anomalies is neither due to fund flows nor career concerns of fund managers.

Keywords: Mutual funds; Anomalies; Value added; Public information; Investment decisions

JEL Classification: G11; G14; G23

Suggested Citation

Christiansen, Charlotte and Xing, Ran and Xu, Yue, Origins of Mutual Fund Skill: Market versus Accounting Based Asset Pricing Anomalies (March 29, 2023). Available at SSRN: https://ssrn.com/abstract=3742096 or http://dx.doi.org/10.2139/ssrn.3742096

Charlotte Christiansen

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Ran Xing

Stockholm University - Stockholm Business School ( email )

Sweden

Aarhus University ( email )

Fuglesangs Allé 4
Aarhus V, 8210
Denmark

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Yue Xu (Contact Author)

Durham University ( email )

176
Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom
+44 07876089739 (Phone)

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