Persistence in Mutual Fund Performance and Time-Varying Risk Exposures
38 Pages Posted: 22 Sep 2009
Date Written: September 12, 2009
Persistence in mutual fund performance is usually measured by the risk-adjusted returns of the portfolio that is long the top and short the bottom past year return deciles. A key challenge is to properly adjust for the time-varying risk exposures of this portfolio. We show that the Fama and French model overestimates persistence at 10.6 percent per annum whilst the Carhart model underestimates persistence at an insignificant 1.9 percent per annum. It is important to consider the dependence of the risk exposures on the sign and magnitude of past factor returns as well as the dispersion in the mutual fund exposures because they determine which funds will be in the top and bottom deciles. Doing so results in a significant risk-adjusted alpha of 6.7 percent per annum. Hence persistence exists.
Keywords: mutual funds, performance persistence, time-varying risk exposures
JEL Classification: G11, G14, G19
Suggested Citation: Suggested Citation