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Bayesian Alphas and Mutual Fund Persistence

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  • JEFFREY A. BUSSE
  • PAUL J. IRVINE

Abstract

We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measure that predicts future performance better than standard measures do. Bayesian alphas based on the Capital Asset Pricing Model (CAPM) are particularly useful for predicting future standard CAPM alphas. Over our sample period, priors consistent with moderate to diffuse beliefs in managerial skill dominate more skeptical prior beliefs, a result that is consistent with investor cash flows.

Suggested Citation

  • Jeffrey A. Busse & Paul J. Irvine, 2006. "Bayesian Alphas and Mutual Fund Persistence," Journal of Finance, American Finance Association, vol. 61(5), pages 2251-2288, October.
    • Handle: RePEc:bla:jfinan:v:61:y:2006:i:5:p:2251-2288
    DOI: 10.1111/j.1540-6261.2006.01057.x
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