Dissertation
ESSAYS ON MUTUAL FUND PERFORMANCE: THE EFFECTS OF LIQUIDITY SERVICE PROVISION, ACTIVE MANAGEMENT AND ALPHA-OPPORTUNITY TIMING
Doctor of Philosophy (PhD), Washington State University
01/2015
Handle:
https://hdl.handle.net/2376/111127
Abstract
This dissertation consists of two essays that study mutual fund performance. Chapter one examines how liquidity service provision by open-end US no-load mutual funds and active portfolio management effect mutual funds performance. To disentangle the effects of liquidity service provision and active portfolio management on mutual fund performance and flows, we benchmark passive funds against ETFs and further benchmark active funds against passive funds. We show that about 75% of passive fund underperformance relative to ETFs is due to higher expense ratios and an additional 14% is due to other costs directly associated with liquidity service provision. Older funds and funds with larger family size are more cost-effective in providing liquidity service to investors, and they also exhibit better active management ability. Examining fund flows, we find that investors of passive funds chase style and investors of active funds chase individual funds based on past performance. Nevertheless, in both cases investors put more money into young funds despite higher cost of liquidity service provision and lower ability of active management of young funds. We find that marketing expenses only partially explain passive fund flows but not active fund flows.
Chapter two investigates timing abilities of alpha-opportunities by mutual fund managers. Active portfolio management is costly and may not deliver higher net returns to investors in the absence of sufficient alpha-opportunities when, e.g., stock returns are predominantly driven by systematic factors and highly correlated. Thus, mutual funds should engage in less active trading when stock valuation is expected to be less divergent. Our results show that mutual funds on average have the ability timing alpha-opportunities, with large-value and large-growth funds exhibiting the strongest timing skill. The results are robust when we control for past fund flows and returns, macroeconomic variables, and other potential timing skills. More importantly, funds with significantly positive timing skill earn 0.05% higher monthly returns, as measured by four-factor alpha, in subsequent month than those with negative timing skill. Our study contributes to the existing literature by proposing a novel measure to assess an important attribute of mutual fund active management ability.
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Details
- Title
- ESSAYS ON MUTUAL FUND PERFORMANCE: THE EFFECTS OF LIQUIDITY SERVICE PROVISION, ACTIVE MANAGEMENT AND ALPHA-OPPORTUNITY TIMING
- Creators
- Gulnara R. Zaynutdinova
- Contributors
- George J Jiang (Advisor)John R Nofsinger (Committee Member)Jarl G Kallberg (Committee Member)Nairanjana Dasgupta (Committee Member)
- Awarding Institution
- Washington State University
- Academic Unit
- Carson College of Business
- Theses and Dissertations
- Doctor of Philosophy (PhD), Washington State University
- Number of pages
- 150
- Identifiers
- 99900581728901842
- Language
- English
- Resource Type
- Dissertation