Volatility and Mutual Fund Manager Skill

43 Pages Posted: 10 Dec 2013 Last revised: 4 Feb 2015

See all articles by Bradford D. Jordan

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: February 2, 2015

Abstract

In a standard four factor framework, mutual fund return volatility is a reliable, persistent, and powerful predictor of future abnormal returns. However, the abnormal returns are eliminated by the addition of a “vol” anomaly factor contrasting returns on portfolios of low and high volatility stocks. Consistent with Novy-Marx (2014) and Fama and French (2014b), the Fama and French (2014a) profitability and investment factors are equally effective at eliminating the abnormal returns. Failure to account for the vol anomaly, either directly or indirectly, can lead to substantial mismeasurement of fund manager skill.

Keywords: Mutual Funds, Skill, Volatility, Market Efficiency, Anomaly

JEL Classification: G11, G12, G14, G20

Suggested Citation

Jordan, Bradford D. and Riley, Timothy Brandon, Volatility and Mutual Fund Manager Skill (February 2, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2365416 or http://dx.doi.org/10.2139/ssrn.2365416

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-4887 (Phone)
859-257-9688 (Fax)

Timothy Brandon Riley (Contact Author)

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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