Are Active Managers a Drag on Investor Wealth? Evidence from an Option-Based Estimation

42 Pages Posted: 29 Oct 2015

See all articles by J. Spencer Martin

J. Spencer Martin

University of Melbourne - Faculty of Business and Economics; Financial Research Network (FIRN)

George Jiaguo Wang

Lancaster University Management School; New York University - Stern School of Business

Date Written: October 29, 2015

Abstract

We estimate an option-based value of a fund manager’s conditional market timing skill in bear market states. We combine this value with alpha based estimates of selection skill to give an overall valuation of active management. At the aggregate level, we estimate that the benefit arising from the option value of active fund management in bad times can be large enough to cover its unconditional overall cost. Our analysis suggests that by taking account of the option premium delivered by managers’ bear market timing skills, the longstanding mutual fund underperformance puzzle could be largely rationalized.

Keywords: Mutual Fund, Bear State, Market Timing, Conditional Performance

JEL Classification: G23, G12, G11

Suggested Citation

Martin, J. Spencer and Wang, George Jiaguo, Are Active Managers a Drag on Investor Wealth? Evidence from an Option-Based Estimation (October 29, 2015). Available at SSRN: https://ssrn.com/abstract=2683360 or http://dx.doi.org/10.2139/ssrn.2683360

J. Spencer Martin

University of Melbourne - Faculty of Business and Economics ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

George Jiaguo Wang (Contact Author)

Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, Lancashire LA1 4YX
United Kingdom
+44 1524 592 577 (Phone)

HOME PAGE: http://www.lancaster.ac.uk/lums/people/george-wang

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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