Idiosyncratic Risk and Mutual Fund Performance

36 Pages Posted: 15 Nov 2013 Last revised: 20 Feb 2018

See all articles by Javier Vidal-García

Javier Vidal-García

Harvard University; Complutense University Madrid

Marta Vidal

Universidad Complutense de Madrid (UCM); Universidad Europea de Madrid

Sabri Boubaker

Champagne School of Management; University Paris-Est Créteil (UPEC) - Institut de Recherche en Gestion

Riadh Manita

Neoma Business School

Date Written: January 1, 2018

Abstract

This paper examines the relation between idiosyncratic risk and mutual fund performance using asset pricing models. We use a unique data set containing monthly returns of 949 UK equity mutual funds over a 28-year period to measure fund performance. We find that idiosyncratic risk cannot be eliminated in UK mutual funds. We show that idiosyncratic risk is negatively related to returns for all funds investment style categories. We present evidence that the inclusion of idiosyncratic risk significantly increases the number of funds showing statistically significant and positive selectivity skills (alpha). Furthermore, all equity mutual funds turn to show significant volatility timing performance when idiosyncratic risk is considered. Finally, we find that idiosyncratic risk can forecast fund returns after controlling for macroeconomic variables.

Keywords: Mutual fund performance, idiosyncratic risk, investment style, market timing

JEL Classification: G11, G12, G14

Suggested Citation

Vidal-García, Javier and Vidal, Marta and Boubaker, Sabri and Manita, Riadh, Idiosyncratic Risk and Mutual Fund Performance (January 1, 2018). Annals of Operation Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2354177 or http://dx.doi.org/10.2139/ssrn.2354177

Javier Vidal-García (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Complutense University Madrid ( email )

School of Business Administration
Somosaguas Campus
Madrid, Madrid 28223
Spain

Marta Vidal

Universidad Complutense de Madrid (UCM) ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain

Universidad Europea de Madrid ( email )

28670 Villaviciosa de Odón
Madrid
Spain

Sabri Boubaker

Champagne School of Management ( email )

217 avenue Pierre Brossolette BP 710
Troyes, Troyes 10002
France
+33 3 25 71 22 31 (Phone)
+33 3 25 49 22 17 (Fax)

HOME PAGE: http://www.get-formation.fr/chercheurs/sabri-boubaker

University Paris-Est Créteil (UPEC) - Institut de Recherche en Gestion ( email )

61 Avenue du General de Gaulle
94010 Creteil
France

HOME PAGE: http://www.irg.u-pec.fr/enseignant.php?num=58

Riadh Manita

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825
France

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