Estimating Short-Run Persistence in Mutual Fund Performance

Posted: 4 Jan 2006

See all articles by Jenke ter Horst

Jenke ter Horst

TIAS School for Business and Society

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Abstract

This paper analyzes the properties of a number of estimators that can be used to estimate short-run persistence in mutual fund returns. When data for different funds are pooled, it is advisable to correct for cross-sectional differences in expected returns. However, these adjustments may induce biases in the estimated persistence coefficients and thus lead to spurious persistence. Theoretical derivations, combined with a Monte Carlo study, show that these biases cannot be neglected for the samples that are typically used in applied work. The short-run persistence is estiamted in two samples of US open-end mutual funds using quarterly returns for 1987-1994. An important conclusion is that the results are quite sensitive to the estimation method that is employed.

Keywords: performance persistence, small sample bias

JEL Classification: G14, C22

Suggested Citation

ter Horst, Jenke R. and Verbeek, Marno, Estimating Short-Run Persistence in Mutual Fund Performance. Review of Economics and Statistics, Vol. 82, pp. 646-655, November 2000, Available at SSRN: https://ssrn.com/abstract=873525

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Marno Verbeek (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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