The Efficiency of Mutual Funds
43 Pages Posted: 19 Apr 2016 Last revised: 4 Aug 2018
Date Written: November 17, 2016
This paper analyzes the short-term market efficiency of the mutual fund industry around the world. Using a unique database of worldwide domestic equity funds, it employs a parametric (regression model) and non-parametric (Data Envelopment Analysis (DEA) model) approaches to establish a relation between cost (expense ratio, turnover, loads, and risk) and benefit (return) of mutual funds. The empirical results of the parametric approach show a statistically significant negative relationship between expenses and risk-adjusted performance across countries. When we reexamine this relationship using a non-parametric approach, we show, in contrast to our previous result, a positive relationship between expenses and risk-adjusted performance. Thus, using the DEA methodology, we find strong evidence that equity mutual funds around the world are approximately mean-variance efficient.
Keywords: Mutual Funds, Portfolio Efficiency, Factor Models, Data Envelopment Analysis
JEL Classification: G11, G12
Suggested Citation: Suggested Citation