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Estimating short-run persistence in mutual fund performance

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  • Horst, J.R. ter
  • Verbeek, M.J.C.M.

    (Tilburg University, Center for Economic Research)

Abstract

This paper analyzes the properties of a number of estimators that can be used to estimate short-run persistence in mutual fund returns. When data for different funds are pooled, it is advisable to correct for cross-sectional differences in expected returns. However, these adjustments may induce biases in the estimated persistence coefficients and thus lead to spurious persistence. Theoretical derivations, combined with a Monte Carlo study, show that these biases cannot be neglected for the samples that are typically used in applied work. We also estimate the short-run persistence in two samples of U.S. open-end mutual funds using quarterly returns for 1987-1994. An important conclusion is that the results are quite sensitive to the estimation method that is employed. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 97.21.

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Date of creation: 1997
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Handle: RePEc:dgr:kubcen:97.21

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Web page: http://center.uvt.nl

Related research

Keywords: portfolio investment; investment trusts; estimation; performance; pension funds;

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  1. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-80.
  2. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
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Cited by:
  1. ter Horst, J.R. & Verbeek, M.J.C.M., 2004. "Fund liquidation, self-selection and look-ahead bias in the hedge fund industry," ERIM Report Series Research in Management ERS-2004-104-F&A, 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.

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