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Estimating the Dynamics of Mutual Fund Alphas and Betas

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  • Matthew Spiegel
  • Harry Mamaysky
  • Hong Zhang
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    Abstract

    Consider an economy in which the underlying security returns follow a linear factor model with constant coeffcients. While portfolios that invest in these securities willin general, have a linear factor structure, it will be one with time-varying coeffcients. However, under certain assumptions regarding the portfolio's investment strategy, it is possible to estimate these time-varying alphas and betas. Importantly, this can be done without direct knowledge of either the portfolio manager's exact investment strategy or of the alphas and betas of the individual securities in which the portfolio invests. This paper develops and estimates a Kalman ?lter statistical model to track time-varying fund alphas and betas. Several tests indicate that relative to a rolling OLS model the Kalman ?lter model produces more accurate fund factor loadings both in and out of sample. This appears to be in large part due to the attempts of fund managers to time the market by varying their fund's risk exposure from period to period. Another advantage of the Kalman ?lter model is that the dynamic parameter estimates can be used to classify funds by their trading strategies and to determine the s

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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm353.

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    Date of creation: 01 Mar 2005
    Date of revision: 01 Apr 2005
    Handle: RePEc:ysm:somwrk:ysm353

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    Cited by:
    1. Ferruz Agudo, Luis & Vargas Magallón, María & Nievas López, J., 2008. "¿Utilizan los gestores españoles de fondos de inversión información privada en sus labores de gestión?," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 26, pages 257-278, Septiembr.
    2. Luis Ferruz Agudo & Maria Vargas Magallon & Jose Sarto, 2006. "Evaluation of performance and conditional information: the case of Spanish mutual funds," Applied Financial Economics, Taylor & Francis Journals, vol. 16(11), pages 803-817.
    3. Kosowski, Robert & Naik, Narayan Y. & Teo, Melvyn, 2007. "Do hedge funds deliver alpha? A Bayesian and bootstrap analysis," Journal of Financial Economics, Elsevier, vol. 84(1), pages 229-264, April.
    4. Matthew Spiegel & Harry Mamaysky & Hong Zhang, 2005. "Improved Forecasting of Mutual Fund Alphas and Betas," Yale School of Management Working Papers amz2361, Yale School of Management, revised 01 Mar 2006.

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