Estimation Risk in Mutual Fund Ratings: The Case of Morningstar
18 Pages Posted: 17 May 2001
Date Written: May 17, 2001
In this paper we examine estimation risk in the well-known Morningstar mutual fund star rating system. We show that due to using a system that rates funds regardless of age differences, Morningstar has created a situation where the estimates upon which younger funds ratings are based have significantly higher estimation risk than the estimates upon which the ratings of older funds are based. As a result, investors can be somewhat less confident that the ratings of young funds are truly what they are estimated to be. We illustrate our point by investigating 1281 international equity mutual funds.
Keywords: Mutual fund ratings, estimation risk, Morningstar
JEL Classification: G23
Suggested Citation: Suggested Citation