Model Uncertainty, Performance Persistence and Flows

74 Pages Posted: 22 Dec 2009

See all articles by Yee Cheng Loon

Yee Cheng Loon

Securities and Exchange Commission (SEC)

Date Written: November 22, 2009

Abstract

Model uncertainty makes it difficult to draw clear inference about mutual fund performance persistence. I propose a new performance measure, Bayesian Model Averaged (BMA) alpha, which explicitly accounts for model uncertainty. Using BMA alphas, I find evidence of performance persistence in a large sample of US funds. There is a positive and asymmetric relation between flows and past BMA alphas, suggesting that fund investors respond to the information in BMA alphas. My findings are robust to various sensitivity analyses, including alternative measures of post-ranking performance, flows and total net assets, and alternative econometric model specifications.

Keywords: Mutual Funds, Performance Persistence, Flows, Model Uncertainty

JEL Classification: G2, G11, C11, C52

Suggested Citation

Loon, Yee Cheng, Model Uncertainty, Performance Persistence and Flows (November 22, 2009). Available at SSRN: https://ssrn.com/abstract=1525458 or http://dx.doi.org/10.2139/ssrn.1525458

Yee Cheng Loon (Contact Author)

Securities and Exchange Commission (SEC) ( email )

100 F Street NE
Washington, DC 20549
United States

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