When is Stock-Picking Likely to be Successful? Evidence from Mutual Funds

29 Pages Posted: 12 Dec 2008 Last revised: 27 Jan 2013

Ying Duan

Simon Fraser University (SFU) - Beedie School of Business

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

R. David McLean

Georgetown University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 8, 2008

Abstract

Consistent with a costly arbitrage equilibrium in which arbitrage costs insulate mispricing, this study finds that mutual fund managers have stock-picking ability for stocks with high idiosyncratic volatility but not for stocks with low idiosyncratic volatility. These findings suggest that fund managers and other investors may want to pay special attention to high-idiosyncratic-volatility stocks because they provide fertile ground for stock picking. The study also finds that the stock-picking ability of the average mutual fund manager declined after the extreme growth in the number of both mutual funds and hedge funds in the late 1990s.

Keywords: mutual funds, insitutional investors, arbitage, limits of arbitrage, idiosyncratic risk, market efficiency

JEL Classification: G11, G14, G20, G23, G29

Suggested Citation

Duan, Ying and Hu, Gang and McLean, R. David, When is Stock-Picking Likely to be Successful? Evidence from Mutual Funds (December 8, 2008). Financial Analysts Journal, Vol. 65, No. 2, pp. 55-66, 2009. Available at SSRN: https://ssrn.com/abstract=1313411

Ying Duan

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://www.mypolyuweb.hk/ganghu

R. David McLean (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC Washington DC 20057
United States

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