Alternative and New Methods for Measuring Persistence in Fund Performance
25 Pages Posted: 5 May 2017
Date Written: May 4, 2017
This research adds to the current literature of measuring fund persistence by introducing two novel quantitative methods. Firstly, an existing method based on the Markov modelling of a fund’s Morningstar rating over time is examined. An improvement to this model is then suggested based on the replacement of the Morningstar ratings with the alpha-based percentile ranking from a factor model. Secondly, a novel method based on the use of survival analysis techniques is explored in the context of a Cox regression model and an accelerated failure time model. The effect of two fund-specific covariates on fund persistence are analysed under these survival models. The improved Markov model and survival models are applied to a set of South African equity mutual funds, with evidence of short-term persistence being found for top and bottom decile performers respectively under both modelling frameworks.
Keywords: mutual funds, fund performance persistence, Markov modelling, survival analysis, South African unit trusts
JEL Classification: G11, G24, C53, C6
Suggested Citation: Suggested Citation