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Time-varying performance of international mutual funds

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  • Turtle, H.J.
  • Zhang, Chengping
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    Abstract

    We examine the ability of one- and two-factor regime switching models to describe US, developed, and emerging market mutual fund returns. We find that a two-factor fixed transition probability model adequately describes the multivariate series of mutual fund returns without the need to model time-varying transition probabilities. Mutual fund performance, as measured by a state dependent Jensen's alpha, varies with economic regimes that are defined according to the global equity market mean. Our primary two-factor fixed transition probability model shows that emerging market mutual fund alphas are often significantly positive in global bull regimes. Consideration of alternative second risk factors suggests that both the foreign exchange factor, or the recently proposed Hou, Karolyi and Kho (2011) value factor can improve series forecasts and out-of-sample portfolio performance.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 19 (2012)
    Issue (Month): 3 ()
    Pages: 334-348

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    Handle: RePEc:eee:empfin:v:19:y:2012:i:3:p:334-348

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Mutual fund performance; Regime-switching models; Fixed transition probabilities; Forecasting;

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