Estimating the Dynamics of Mutual Fund Alphas and Betas

40 Pages Posted: 10 Mar 2005

See all articles by Matthew I. Spiegel

Matthew I. Spiegel

Yale University - Yale School of Management, International Center for Finance

Harry Mamaysky

Columbia University - Columbia Business School

Hong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2004

Abstract

Consider an economy in which the underlying security returns follow a linear factor model with constant coeffcients. While portfolios that invest in these securities willin general, have a linear factor structure, it will be one with time-varying coeffcients. However, under certain assumptions regarding the portfolio's investment strategy, it is possible to estimate these time-varying alphas and betas. Importantly, this can be done without direct knowledge of either the portfolio manager's exact investment strategy or of the alphas and betas of the individual securities in which the portfolio invests. This paper develops and estimates a Kalman filter statistical model to track time-varying fund alphas and betas. Several tests indicate that relative to a rolling OLS model the Kalman filter model produces more accurate fund factor loadings both in and out of sample. This appears to be in large part due to the attempts of fund managers to time the market by varying their fund's risk exposure from period to period. Another advantage of the Kalman filter model is that the dynamic parameter estimates can be used to classify funds by their trading strategies and to determine the source of a fund's profits or losses. The tests in this paper indicate that the superior and inferior returns produced by some funds arise almost entirely from attempts at market timing rather than managerial selectionability. However, as other research in the area of mutual fund performance measurement have found, overall there appears to be little evidence that, inaggregate, fund investors earn superior returns.

JEL Classification: G12, G13

Suggested Citation

Spiegel, Matthew I. and Mamaysky, Harry and Zhang, Hong, Estimating the Dynamics of Mutual Fund Alphas and Betas (October 25, 2004). Yale ICF Working Paper No. 03-03; EFA 2003 Annual Conference Paper No. 803; AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=389740

Matthew I. Spiegel (Contact Author)

Yale University - Yale School of Management, International Center for Finance ( email )

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HOME PAGE: http://som.yale.edu/~spiegel

Harry Mamaysky

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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