Dynamic Excess Autocorrelation and Mutual Fund Performance
AFA 2014 Philadelphia Meetings Paper
86 Pages Posted: 13 Mar 2013 Last revised: 31 Mar 2020
Date Written: January 1, 2014
Positive return correlation signals slowly-diffusing information. Short sell-constrained institutions are mainly informed in their buy trades. Building on these facts, we identify informed investors ex ante by focusing on mutual funds. We propose a measure of the dynamic excess autocorrelation (DEA) of fund portfolios. High-DEA funds persistently outperform by 3.5% annually. Our framework shows that the DEA identifies informed managers who dynamically rebalance to buy portfolios with slowly-diffusing positive information, which are thus positively autocorrelated and subsequently outperform. We support such intuition with high- and low-frequency evidence. The DEA performance predictability stems from a novel portfolio-level, cross-stock linkage.
Keywords: Mutual Fund Performance, Serial Correlation, Informed Traders
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation