Mutual Fund Persistence Using Kalman Filter Models
25 Pages Posted: 14 Aug 2015 Last revised: 30 Aug 2015
Date Written: August 27, 2015
Using a dynamic state-space framework, we examine the persistence of US equity mutual fund performance. Performance is estimated from standard factor models via a Kalman filter following that of Mamaysky et al. (2008), which has not been used in the persistence literature until now. Persistence is tested across monthly, quarterly, biannual and annual horizons from 1995 to 2015. In opposition with current literature, we present strong evidence that funds exhibit persistence in risk-adjusted performance across all measurement horizons, and is not driven by fund fees. However, persistence in risk-adjusted performance is unable to translate into immediately higher net returns for investors. These findings lend support to the notion that some fund managers do possess skill in their ability to select stocks.
Keywords: Mutual funds, Performance persistence, Kalman Filter
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