Time-Varying Performance of International Mutual Funds

41 Pages Posted: 4 May 2012 Last revised: 23 May 2015

See all articles by Harry J. Turtle

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate

Chengping Zhang

George Fox University

Abstract

We examine the ability of one- and two-factor regime switching models to describe U.S., developed, and emerging market mutual fund returns. We find that a two-factor fixed transition probability model adequately describes the multivariate series of mutual fund returns without the need to model time-varying transition probabilities. Mutual fund performance, as measured by a state dependent Jensen’s alpha, varies with economic regimes that are defined according to the global equity market mean. Our primary two-factor fixed transition probability model shows that emerging market mutual fund alphas are often significantly positive in global bull regimes. Consideration of alternative second risk factors suggests that both the foreign exchange factor, or the recently proposed Hou, Karolyi and Kho (2011) value factor can improve series forecasts and out-of-sample portfolio performance.

Keywords: Mutual fund performance, Regime-switching models, Fixed transition probabilities, Forecasting

JEL Classification: C32, G11, G12, G15

Suggested Citation

Turtle, Harry J. and Zhang, Chengping, Time-Varying Performance of International Mutual Funds. Journal of Empirical Finance, Vol. 19, No. 3, 2012. Available at SSRN: https://ssrn.com/abstract=2050624

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Chengping Zhang (Contact Author)

George Fox University ( email )

414 N. Meridian Street
Newberg, OR 97132
United States

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