A Horizon Based Decomposition of Mutual Fund Value Added Using Transactions

55 Pages Posted: 18 Nov 2019 Last revised: 16 Nov 2020

See all articles by Jules H. van Binsbergen

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Jungsuk Han

Swedish House of Finance

Hongxun Ruan

Guanghua School of Management, Peking University

Ran Xing

Aarhus University; Danish Finance Institute

Date Written: November 7, 2019

Abstract

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

van Binsbergen, Jules H. and Han, Jungsuk and Ruan, Hongxun and Xing, Ran, A Horizon Based Decomposition of Mutual Fund Value Added Using Transactions (November 7, 2019). Available at SSRN: https://ssrn.com/abstract=3478745 or http://dx.doi.org/10.2139/ssrn.3478745

Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

Jungsuk Han

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Hongxun Ruan

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

Ran Xing (Contact Author)

Aarhus University ( email )

Fuglesangs Allé 4
Aarhus V, 8210
Denmark

Danish Finance Institute ( email )

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