Seasonality and Idiosyncratic Risk in Mutual Fund Performance
European Journal of Operational Research 233 (2014), pp. 613-624
34 Pages Posted: 6 Feb 2012 Last revised: 19 Nov 2014
Date Written: June 1, 2013
This paper examines the relationship between seasonality, idiosyncratic risk and mutual fund returns using multifactor models. We use a large sample containing the return histories of 728 UK mutual funds over a 23-year period to measure fund performance. We present evidence that idiosyncratic risk cannot be eliminated, we also find evidence of seasonality in all fund categories. Specifically, we find a close relation between the seasonality and the end of the tax-year. We document that the idiosyncratic risk puzzle cannot explain seasonality in fund performance in the UK. Although, we do find that idiosyncratic risk can account for the seasonality in the month of April. Thus, the results show a link between the taxloss selling hypothesis in April and idiosyncratic risk in that month. Finally, we report evidence that idiosyncratic risk is negatively related to expected returns for most fund classes.
Keywords: Mutual fund performance, seasonality, idiosyncratic risk, tax-loss selling
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation