Information and Implementation: Assessing the Net Impact of Trading on Mutual Funds

29 Pages Posted: 27 May 2011

See all articles by Roger M. Edelen

Roger M. Edelen

Virginia Tech

Richard B. Evans

University of Virginia - Darden School of Business

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: May 23, 2011

Abstract

Studies examine the relation between mutual fund performance and trading cost using a variety of proxies - the most common being portfolio turnover. Overall, the evidence is consistent with informational equilibrium, i.e., trading has zero net impact on performance. We offer an alternative explanation, that common trade cost proxies lack statistical power. We show that a necessary condition for statistical power that common trading cost proxies such as turnover fail to satisfy: the proxy must jointly reflect both the volume and per unit cost of trading. Using this observation we develop a simple proxy for trading cost that sorts performance differences of 233 bps per year across fund quartiles, and forecasts fund returns better than past performance, fund size, expense ratios, or other proxies for trading cost.

Keywords: Mutual fund, trading costs, turnover

JEL Classification: G11, G20, G24

Suggested Citation

Edelen, Roger M. and Evans, Richard B. and Kadlec, Gregory B., Information and Implementation: Assessing the Net Impact of Trading on Mutual Funds (May 23, 2011). Available at SSRN: https://ssrn.com/abstract=1852505 or http://dx.doi.org/10.2139/ssrn.1852505

Roger M. Edelen (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4316 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
156
Abstract Views
857
rank
189,366
PlumX Metrics