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The Hazards of Mutual Fund Underperformance: A Cox Regression Analysis

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Asger Lunde
Allan Timmermann
David Blake

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Abstract

This paper investigates the process determining mutual funds' conditional probability of closure, i.e. their hazard function. Using a nonparametric approach to estimate the effects of a fund's age on its hazard rate, we find a distinctly nonlinear, inverse U-shaped pattern in the relationship. Hence young and very old funds are least likely to be closed down. A fund's relative performance and (less significantly) the level of return in the sector in which the fund operates are also identified as important factors in the closure decision. Results from semiparametric Cox regressions are compared with those from the discrete choice probit model used by Brown and Goetzmann (1995). Finally, we provide a complete summary of the fund attrition process by estimating the survivor function, indicating the proportion of funds that survive up to a given age, and we identify the effect of fund attrition on standard measures of persistence of fund performance.

* University of Aarhus

** Birbeck College, University of London

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number 98-11.

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Date of creation: Apr 1998
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Handle: RePEc:cdl:ucsdec:98-11

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  1. Qiang Bu & Nelson Lacey, 2009. "On understanding mutual fund terminations," Journal of Economics and Finance, Springer, vol. 33(1), pages 80-99, January. [Downloadable!] (restricted)
  2. Carree, M.A., 2000. "Interest and Hazard Rates of Russian Saving Banks," Research Paper ERS-2000-26-STR Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  3. Kozo Kiyota & Miho Takizawa, 2006. "The Shadow of Death: Pre-exit Performance of Firms in Japan," Discussion papers 06033, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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  4. Stephen Brown, 1999. "Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-077, New York University, Leonard N. Stern School of Business-. [Downloadable!]
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