A Horizon Based Decomposition of Mutual Fund Value Added Using Transactions
55 Pages Posted: 18 Nov 2019 Last revised: 16 Nov 2020
Date Written: November 7, 2019
We propose a model featuring horizon-specific mutual fund manager skill. Managers optimally choose their holdings based on their skill and the price impact of their trades. Fund turnover negatively correlates with the horizon over which value is added and positively correlates with price impact costs, while the correlation with fund size is ambiguous. We empirically evaluate the model using transaction-level data and decompose funds' value added based on the past length of funds' holdings. Holdings of high-turnover funds add a substantial amount of value in the first two months, while holdings of low-turnover funds only add value over longer horizons.
Keywords: mutual funds, investment horizon, transaction data, daily holdings, horizon-specific skill
JEL Classification: G23
Suggested Citation: Suggested Citation