Risk Shifting and Mutual Fund Performance
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In this article, the authors investigated the performance consequences of risk shifting, as well as the economic motivations and the mechanisms for risk shifting using a holdings-based measure of risk shifts, and found that funds that increase risk perform worse than funds that keep stable risk levels over time.Abstract:
Mutual funds change their risk levels significantly over time This paper investigates the performance consequences of risk shifting, as well as the economic motivations and the mechanisms of risk shifting Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time In addition, funds that expect higher benefits from risk shifting are more likely to increase risk and perform particularly poorly after increasing risk Our results are consistent with the notion that agency problems, rather than the ability to take advantage of changing investment opportunities, are the likely motivation behind risk shifting behaviorread more
Citations
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Style drift: Evidence from small-cap mutual funds
TL;DR: The authors found that small-cap mutual funds allocate on average 27% of their portfolio to mid-and large-cap stocks, consistent with funds straying from their objective over time, but investors do not experience higher abnormal returns or performance persistence overall.
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Changes to mutual fund risk: Intentional or mean reverting?
TL;DR: This paper found no evidence of a relation between past performance and intended changes to return variance or tracking error variance, and showed that most funds trade to reduce risk and, in particular, track error variance.
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Out-of-Sample Performance of Mutual Fund Predictors
Christopher S. Jones,Haitao Mo +1 more
TL;DR: In this paper, the authors analyze the out-of-sample performance of variables shown to forecast future mutual fund alphas, and find no evidence that the declines are the result of data snooping or learning by investors or fund managers.
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Are Star Funds Really Shining? Cross-Trading and Performance Shifting in Mutual Fund Families
TL;DR: In this article, the authors employ transaction data to examine trades between funds affiliated to the same institution and show that such cross-trades exhibit an average mispricing of 0.18% compared to open market trades.
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Time Horizon Trading and the Idiosyncratic Risk Puzzle
TL;DR: In this article, the authors adopt a wavelet multiresolution analysis to decompose returns distribution for different time scales, showing that the idiosyncratic risk puzzle disappears as the wavelet scale increases (long-term horizons).
References
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Common risk factors in the returns on stocks and bonds
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.
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Risk, Return, and Equilibrium: Empirical Tests
Eugene F. Fama,James D. MacBeth +1 more
TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
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On Persistence in Mutual Fund Performance
TL;DR: Using a sample free of survivor bias, this paper showed that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual fund's mean and risk-adjusted returns.
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The performance of mutual funds in the period 1945–1964
TL;DR: Jensen's Alpha as discussed by the authors is a risk-adjusted measure of portfolio performance that estimates how much a manager's forecasting ability contributes to the fund's returns, based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated).
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Liquidity Risk and Expected Stock Returns
Lubos Pastor,Robert F. Stambaugh +1 more
TL;DR: In this article, the authors investigated whether marketwide liquidity is a state variable important for asset pricing and found that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity.