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Do Funds Make More When They Trade More?

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  • ĽUBOŠ PÁSTOR
  • ROBERT F. STAMBAUGH
  • LUCIAN A. TAYLOR

Abstract

We find that active mutual funds perform better after trading more. This time-series relation between a fund’s turnover and its subsequent benchmarkadjusted return is especially strong for small, high-fee funds. These results are consistent with high-fee funds having greater skill to identify time-varying profit opportunities and with small funds being more able to exploit those opportunities. In addition to this novel evidence of managerial skill and fund-level decreasing returns to scale, we find evidence of industry-level decreasing returns: The positive turnover-performance relation weakens when funds act more in concert. We also identify a common component of fund trading that is correlated with mispricing proxies and helps predict fund returns.
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Suggested Citation

  • Ľuboš Pástor & Robert F. Stambaugh & Lucian A. Taylor, 2017. "Do Funds Make More When They Trade More?," Journal of Finance, American Finance Association, vol. 72(4), pages 1483-1528, August.
  • Handle: RePEc:bla:jfinan:v:72:y:2017:i:4:p:1483-1528
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    File URL: http://hdl.handle.net/10.1111/jofi.2017.72.issue-4
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    Cited by:

    1. Harrison Hong & Frank Weikai Li & Jiangmin Xu, 2016. "Climate Risks and Market Efficiency," NBER Working Papers 22890, National Bureau of Economic Research, Inc.
    2. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2015. "Scale and skill in active management," Journal of Financial Economics, Elsevier, vol. 116(1), pages 23-45.
    3. Lubos Pastor & Robert F. Stambaugh & Lucian A. Taylor, 2017. "Fund Tradeoffs," NBER Working Papers 23670, National Bureau of Economic Research, Inc.
    4. Dahlquist, Magnus & Odegaard, Bernt Arne, 2018. "A Review of Norges Bank's Active Management of the Government Pension Fund Global," UiS Working Papers in Economics and Finance 2018/1, University of Stavanger.
    5. repec:eee:jfinec:v:127:y:2018:i:2:p:325-341 is not listed on IDEAS

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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