A new family of equity style indices and mutual fund performance: Do liquidity and idiosyncratic risk matter?

Niklas Wagner and Elisabeth Winter

Journal of Empirical Finance, 2013, vol. 21, issue C, 69-85

Abstract: We propose and test novel multifactor models of daily mutual fund performance. To this aim, we set up equity style indices and derive risk factors, which nest the established Fama and French (1992) and Carhart (1997) factors. We add two additional risk factors, namely idiosyncratic risk and Amihud (2002) liquidity. Our sample contains 528 actively managed mutual funds with European stock market focus during 2002 to 2009. Model estimation reveals that—while market excess return and size appear significant for the cross-section of all funds—the remainder factors explain the performance of subsets of funds. About one third of the funds exhibit significant factor sensitivities not only with respect to valuation or momentum, but also with respect to liquidity or idiosyncratic risk. No single risk factor is dominated and hence our six factor model may serve as a valid performance benchmark. In a four factor model setting, the Carhart model and a model with valuation replaced by liquidity perform best. Our results remain stable under various robustness checks. We further document that managers on average prefer liquid stocks, show no aggregate idiosyncratic risk preference and deliver results that are consistent with equilibrium models of fund performance.

Keywords: Asset pricing anomalies; Risk factors; Mutual fund performance; Value and growth; Idiosyncratic risk; Liquidity (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539812000898
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:21:y:2013:i:c:p:69-85

DOI: 10.1016/j.jempfin.2012.12.005

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().