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The components of tracking error, interim trading and mutual fund performance

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  • Matallín-Sáez, Juan Carlos
  • de Mingo-López, Diego Víctor

Abstract

This study examines active management due to interim trading in mutual funds. We propose a novel and standardized measure to estimate active management within a quarter. This measure is based on the fund tracking error in relation to the behaviour of a synthetic portfolio emulating its initial weight structure. In implementing a factor pricing model, this measure is decomposed into two components related to fund intra-quarterly changes in systematic and idiosyncratic risks. Results show that funds experience low levels of active management within a quarter, mainly arising from the differences in fund and synthetic portfolio residuals. In addition, interim trading erodes fund performance in the short term. Nonetheless, a positive effect on traditional alphas arises in the mid-term, linked to strategic asset allocation decisions. The suggested measure and the reported evidence are of interest to help stakeholders to understand and evaluate the impact of unobservable managerial decisions.

Suggested Citation

  • Matallín-Sáez, Juan Carlos & de Mingo-López, Diego Víctor, 2025. "The components of tracking error, interim trading and mutual fund performance," International Review of Economics & Finance, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:reveco:v:98:y:2025:i:c:s1059056025000371
    DOI: 10.1016/j.iref.2025.103874
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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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