Mutual Fund Performance: A Market Efficiency Perspective
Investment Analysts Journal, 45(4), 1-15 (2016)
26 Pages Posted: 31 Oct 2015 Last revised: 22 Jun 2016
Date Written: 2016
This study reconciles existing literature on stock market efficiency and mutual fund performance by developing a framework that allows testing whether fund managers are able to exploit market inefficiencies. We find a positive relationship between alpha and weak form market efficiency. Most funds are unable to systematically outperform the market, although a few funds do seem to handle relatively inefficient markets well. Top performing funds are characterized by a better management of downside risk in times of market distress, whilst simultaneously exploiting learning effects when markets return to equilibrium. Conditioning fund performance on the state of the underlying market we propose a conditional alpha ratio, which helps in better understanding fund performance and can improve the fund selection process for investors.
Keywords: Mutual fund performance, time-varying weak-form market efficiency, adaptive markets hypothesis
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation