Factor Exposure Variation and Mutual Fund Performance
Financial Analyst Journal, Forthcoming
38 Pages Posted: 30 Aug 2018 Last revised: 1 Dec 2020
Date Written: November 12, 2018
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: Suggested Citation