Bayesian Alphas and Mutual Fund Persistence

64 Pages Posted: 11 Nov 2002

See all articles by Jeffrey A. Busse

Jeffrey A. Busse

Emory University - Department of Finance

Paul J. Irvine

Neeley School of Business

Date Written: July 2003

Abstract

Using daily returns, we find that Bayesian alphas that incorporate fund expenses and a long history of factor returns predict future mutual fund Sharpe ratios significantly better than traditional measures. For investors who believe in managerial skill, Bayesian measures choose funds that subsequently outperform funds chosen by standard single- or four-factor alphas. For investors who are skeptical of managerial skill, Bayesian measures choose funds that subsequently outperform funds chosen by expenses. Over our entire sample period, we find that priors consistent with a moderate belief in managerial skill dominate the more extreme skeptical or diffuse prior beliefs. Since a model with diffuse prior beliefs in managerial skill best predicts actual fund cash flows, our results suggest that Bayesian alphas can help investors choose better performing funds.

Note: This abstract published previously with an incorrect affiliation listed for both authors. SSRN regrets the error.

Suggested Citation

Busse, Jeffrey A. and Irvine, Paul J., Bayesian Alphas and Mutual Fund Persistence (July 2003). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=342720 or http://dx.doi.org/10.2139/ssrn.342720

Jeffrey A. Busse (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-0160 (Phone)
404-727-5238 (Fax)

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

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