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Is the Rating Given to a European Mutual Fund a Good Indicator of Its Future Performance?

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  • Vincent Fromentin

    (CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

  • Christine Louargant

Abstract

The objective of this paper is to investigate whether the rating of a fund is a determinant of its future performance. This study focuses on the Fundclass ratings for a sample of 1,452 EU funds with a similar style of management for the period 2003–12 (a period marked by economic crisis). By using the methodology of non-stationary panel data, we simultaneously assess the long- and short-term relationship between fund performance and scoring, using a vector error correction model. Our results conclude that there is a positive relationship between these two variables over time. Nevertheless, in the short term, this relationship is only valid for the period 2007–12, especially for funds with a good rating.
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Suggested Citation

  • Vincent Fromentin & Christine Louargant, 2014. "Is the Rating Given to a European Mutual Fund a Good Indicator of Its Future Performance?," Post-Print hal-01369862, HAL.
  • Handle: RePEc:hal:journl:hal-01369862
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01369862
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    References listed on IDEAS

    as
    1. Bar-Isaac, Heski & Shapiro, Joel, 2013. "Ratings quality over the business cycle," Journal of Financial Economics, Elsevier, vol. 108(1), pages 62-78.
    2. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    3. Rablen, Matthew D., 2013. "Divergence in credit ratings," Finance Research Letters, Elsevier, vol. 10(1), pages 12-16.
    4. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    5. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
    6. Blake, Christopher R. & Morey, Matthew R., 2000. "Morningstar Ratings and Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 451-483, September.
    7. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    8. Guercio, Diane Del & Tkac, Paula A., 2008. "Star Power: The Effect of Monrningstar Ratings on Mutual Fund Flow," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(4), pages 907-936, December.
    9. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(1), pages 1-21, March.
    10. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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