Download This PaperDo Funds Make More When They Trade More?
Journal of Finance, Forthcoming
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
53 Pages Posted: 16 Nov 2014 Last revised: 11 Oct 2016
There are 4 versions of this paper
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Date Written: October 9, 2016
Abstract
We model fund turnover in the presence of time-varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark-adjusted return. We find such a relation for equity mutual funds. This time-series relation between turnover and performance is stronger than the cross-sectional relation, as the model predicts. Also as predicted, the turnover-performance relation is stronger for funds trading less-liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund's performance.
Keywords: turnover, skill, performance, active management, mutual funds
JEL Classification: G10, G20
Suggested Citation: Suggested Citation
Lubos Pastor
University of Chicago - Booth School of Business ( email )
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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/
Robert F. Stambaugh
University of Pennsylvania - The Wharton School ( email )
The Wharton School, Finance Department
University of Pennsylvania
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United States
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Lucian A. Taylor (Contact Author)
University of Pennsylvania - The Wharton School ( email )
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Philadelphia, PA 19104-6365
United States
HOME PAGE: http://finance.wharton.upenn.edu/~luket/