Time-Varying Performance of International Mutual Funds
41 Pages Posted: 4 May 2012 Last revised: 23 May 2015
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: Suggested Citation