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Abnormal profits and relative strength in mutual fund returns

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  • David A. Volkman
  • Mark E. Wohar

Abstract

This study investigates the relative strength in mutual fund performance by employing three different empirical methods to analyze the profitability of twenty trading strategies, based on varying evaluation horizons and investment periods. Specifically, we test for positive persistence in fund performance by focusing on the optimal weighting of past performance information. Counter to an earlier study on relative strength of fund performance, this study's results do not support the decay of performance persistence after one year. Rather, we find persistent abnormal fund returns over a one to three year investment period based on a three to four year evaluation horizon. In addition, results show that relative strength in fund performance is directly related to persistence in superior performing funds rather than a function of persistence in inferior performing funds.

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  • David A. Volkman & Mark E. Wohar, 1996. "Abnormal profits and relative strength in mutual fund returns," Review of Financial Economics, John Wiley & Sons, vol. 5(2), pages 101-116.
    • Handle: RePEc:wly:revfec:v:5:y:1996:i:2:p:101-116
    DOI: 10.1016/S1058-3300(96)90009-9
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    1. Jason P. Berkowitz & Patrick J. Schorno & Dmitry A. Shapiro, 2017. "Characteristics of mutual funds with extreme performance," Review of Financial Economics, John Wiley & Sons, vol. 34(1), pages 50-60, September.
    2. Prather, Laurie & Bertin, William J. & Henker, Thomas, 2004. "Mutual fund characteristics, managerial attributes, and fund performance," Review of Financial Economics, Elsevier, vol. 13(4), pages 305-326.
    3. Loviscek, Anthony L. & Jordan, W. John, 2000. "Stock selection based on Morningstar's ten-year, five-star general equity mutual funds," Financial Services Review, Elsevier, vol. 9(2), pages 145-157, 00.
    4. Berkowitz, Jason P. & Schorno, Patrick J. & Shapiro, Dmitry A., 2017. "Characteristics of mutual funds with extreme performance," Review of Financial Economics, Elsevier, vol. 34(C), pages 50-60.
    5. Laurie Prather & William J. Bertin & Thomas Henker, 2004. "Mutual fund characteristics, managerial attributes, and fund performance," Review of Financial Economics, John Wiley & Sons, vol. 13(4), pages 305-326.

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