Research Repository

Time-varying skills (versus luck) in U.S. active mutual funds and hedge funds

Cai, Biqing and Cheng, Tingting and Yan, Cheng (2018) 'Time-varying skills (versus luck) in U.S. active mutual funds and hedge funds.' Journal of Empirical Finance, 49. pp. 81-106. ISSN 0927-5398

[img] Text
1s20S0927539818300689main.pdf - Accepted Version
Available under License Creative Commons Attribution Non-commercial No Derivatives.

Download (1MB)


In this paper, we develop a nonparametric methodology for estimating and testing time-varying fund alphas and betas as well as their long-run counterparts (i.e., their time-series averages). Traditional linear factor model arises as a special case without time variation in coefficients. Monte Carlo simulation evidence suggests that our methodology performs well in finite samples. Applying our methodology to U.S. mutual funds and hedge funds, we find most fund alphas decrease with time. Combining our methodology with the bootstrap method which controls for ‘luck’, positive long-run alphas of mutual funds but hedge funds disappear, while negative long-run alphas of both mutual and hedge funds remain. We further check the robustness of our results by altering benchmarks, fund skill indicators and samples.

Item Type: Article
Uncontrolled Keywords: Fund performance evaluation; Mutual fund and hedge fund; Skill vs. luck; Time-varying coefficient model
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 01 Oct 2018 09:32
Last Modified: 18 Aug 2022 12:56

Actions (login required)

View Item View Item