Out-of-Sample Performance of Mutual Fund Predictors

52 Pages Posted: 28 May 2017  

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Haitao Mo

E. J. Ourso College of Business, Louisiana State University

Date Written: November 1, 2016

Abstract

This study analyzes the out-of-sample performance of a variety of variables shown in prior work to forecast future mutual fund alphas. Overall, we find that the degree of predictability, as measured by alpha spreads from quintile sorts or by cross-sectional regression slopes, falls by at least half following the end of the sample and perhaps by 75% after publication. This decline is not driven by changes in fund flows or expenses, suggesting that it is not explained by the model of Berk and Green (2004). Rather, we find that the shrinking of alpha spreads is associated with higher levels of arbitrage activity, and that this largely explains the out-of-sample decline.

Keywords: mutual funds, out-of-sample performance, market efficiency

JEL Classification: G12, G14, G23

Suggested Citation

Jones, Christopher S. and Mo, Haitao, Out-of-Sample Performance of Mutual Fund Predictors (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2975430 or http://dx.doi.org/10.2139/ssrn.2975430

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Haitao Mo (Contact Author)

E. J. Ourso College of Business, Louisiana State University ( email )

E. J. Ourso College of Business
Louisiana State University
Baton Rouge, LA 70803
United States

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