Risk Factor Exposure Variation and Mutual Fund Performance

58 Pages Posted: 30 Aug 2018 Last revised: 12 Nov 2018

See all articles by Manuel Ammann

Manuel Ammann

University of St. Gallen - School of Finance

Sebastian Fischer

University of St. Gallen - School of Finance

Florian Weigert

University of St. Gallen - School of Finance

Date Written: November 12, 2018

Abstract

We investigate the relationship between a mutual fund’s variation in systematic risk factor exposures and its future performance. Using a dynamic state space version of Carhart (1997)’s four factor model to capture risk factor variation, we find that funds with volatile risk factor exposures underperform funds with stable risk factor exposures by 147 basis points p.a. This underperformance is neither explained by volatile risk factor loadings of a fund's equtiy holdings nor driven by a fund's forced trading through investor flows. We conclude that fund managers voluntarily attempt to time risk factors, but are unsuccessful at doing so. Our results are important in the light of recent discussions about the predictability of asset pricing risk factors.

Keywords: Mutual Fund, Market Timing, Factor Timing, Kalman Filter

JEL Classification: G11, G14, G20, G23

Suggested Citation

Ammann, Manuel and Fischer, Sebastian and Weigert, Florian, Risk Factor Exposure Variation and Mutual Fund Performance (November 12, 2018). University of St.Gallen, School of Finance Research Paper No. 2018/17. Available at SSRN: https://ssrn.com/abstract=3235989 or http://dx.doi.org/10.2139/ssrn.3235989

Manuel Ammann

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Sebastian Fischer

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Florian Weigert (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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