The Hazards of Mutual Fund Underperformance: A Cox Regression Analysis
AbstractThis 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.
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Bibliographic InfoPaper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt1pd3z1hm.
Date of creation: 01 Apr 1998
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mutual funds; duration analysis; Cox regression; discrete choice model;
Other versions of this item:
- Lunde, Asger & Timmermann, Allan & Blake, David, 1999. "The hazards of mutual fund underperformance: A Cox regression analysis," Journal of Empirical Finance, Elsevier, vol. 6(2), pages 121-152, April.
- Allan Timmermann & Asger Lunde, 1998. "The Hazards of Mutual Fund Underperformance: A Cox Regression Analysis," FMG Discussion Papers dp302, Financial Markets Group.
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