Mutual Funds Performance
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- Date Submitted: 04/17/2011 01:43 PM
- Pages: 52
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JFQ_462_2011Apr_Qian_ms2998_orig.pdf
FINAL - 7/25/09 - PM
2998R2
Stale Prices and the Performance Evaluation of Mutual Funds
Meijun Qian National University of Singapore
Qian, bizqmj@nus.edu.sg, NUS Business School & Risk Management Institute, National University of Singapore, 1 Business Link, BIZ1 #02-01, Singapore, 117592. I thank Paul Malatesta (the editor), an anonymous referee, my dissertation chair, Wayne Ferson, and the committee members, Jeff Pontiff, David Chapman, Edith Hotchkiss, and Hassan Tehranian for valuable discussions and comments. Any remaining errors are mine.
JFQ_462_2011Apr_Qian_ms2998_orig.pdf
Stale Prices and the Performance Evaluation of Mutual Funds
Abstracts Staleness in measured prices imparts a positive statistical bias and a negative dilution effect on mutual fund performance. First, evaluating performance with nonsynchronous data generates a spurious component of alpha. Second, stale prices create arbitrage opportunities for high-frequency traders whose trades dilute the portfolio returns and hence fund performance. This paper introduces a model that evaluates fund performance while controlling directly for these biases. Empirical tests of the model show that alpha net of these biases is on average positive although not significant and about 40 basis points higher than alpha measured without controlling for the impacts of stale pricing. The difference between the net alpha and the measured alpha consists of three components: a statistical bias, the dilution effect of long-term fund flows, and the dilution effect of arbitrage flows. Whereas the two former are small, the latter is large and widespread in the fund industry.
JEL Classifications: G12, G14. Key Words: Performance evaluation, stale pricing, timing arbitrage, flows.
1
JFQ_462_2011Apr_Qian_ms2998_orig.pdf
I. Introduction Mutual fund performance evaluation has long been an important and interesting question to finance researchers as...
FINAL - 7/25/09 - PM
2998R2
Stale Prices and the Performance Evaluation of Mutual Funds
Meijun Qian National University of Singapore
Qian, bizqmj@nus.edu.sg, NUS Business School & Risk Management Institute, National University of Singapore, 1 Business Link, BIZ1 #02-01, Singapore, 117592. I thank Paul Malatesta (the editor), an anonymous referee, my dissertation chair, Wayne Ferson, and the committee members, Jeff Pontiff, David Chapman, Edith Hotchkiss, and Hassan Tehranian for valuable discussions and comments. Any remaining errors are mine.
JFQ_462_2011Apr_Qian_ms2998_orig.pdf
Stale Prices and the Performance Evaluation of Mutual Funds
Abstracts Staleness in measured prices imparts a positive statistical bias and a negative dilution effect on mutual fund performance. First, evaluating performance with nonsynchronous data generates a spurious component of alpha. Second, stale prices create arbitrage opportunities for high-frequency traders whose trades dilute the portfolio returns and hence fund performance. This paper introduces a model that evaluates fund performance while controlling directly for these biases. Empirical tests of the model show that alpha net of these biases is on average positive although not significant and about 40 basis points higher than alpha measured without controlling for the impacts of stale pricing. The difference between the net alpha and the measured alpha consists of three components: a statistical bias, the dilution effect of long-term fund flows, and the dilution effect of arbitrage flows. Whereas the two former are small, the latter is large and widespread in the fund industry.
JEL Classifications: G12, G14. Key Words: Performance evaluation, stale pricing, timing arbitrage, flows.
1
JFQ_462_2011Apr_Qian_ms2998_orig.pdf
I. Introduction Mutual fund performance evaluation has long been an important and interesting question to finance researchers as...