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Idiosyncratic risk and mutual fund performance

Author

Listed:
  • Javier Vidal-García

    (Complutense University of Madrid)

  • Marta Vidal

    (Complutense University of Madrid)

  • Sabri Boubaker

    (South Champagne Business School
    Vietnam National University)

  • Riadh Manita

    (Neoma Business School)

Abstract

In this paper we present new evidence on the relation between idiosyncratic risk and mutual fund performance using asset pricing models. We use a unique data set containing monthly returns of 949 UK equity mutual funds over a 28-year period to measure fund performance. We find that idiosyncratic risk cannot be eliminated in UK mutual funds. We show that idiosyncratic risk is negatively related to returns for all funds investment style categories. We present evidence that the inclusion of idiosyncratic risk significantly increases the number of funds showing statistically significant and positive selectivity skills (alpha). Furthermore, all equity mutual funds turn to show significant volatility timing performance when idiosyncratic risk is considered. Finally, we find that idiosyncratic risk can forecast fund returns after controlling for macroeconomic variables.

Suggested Citation

  • Javier Vidal-García & Marta Vidal & Sabri Boubaker & Riadh Manita, 2019. "Idiosyncratic risk and mutual fund performance," Annals of Operations Research, Springer, vol. 281(1), pages 349-372, October.
    • Handle: RePEc:spr:annopr:v:281:y:2019:i:1:d:10.1007_s10479-018-2794-2
    DOI: 10.1007/s10479-018-2794-2
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    More about this item

    Keywords

    Mutual fund performance; Idiosyncratic risk; Investment style; Market timing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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