Do Funds Make More When They Trade More?

Lubos Pastor, Robert Stambaugh and Lucian A. Taylor

No 20700, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model optimal fund turnover in the presence of time-varying profit opportunities. Our model predicts a positive relation between an active fund’s turnover and its subsequent benchmark-adjusted return. We find such a relation for equity mutual funds. This time-series relation between turnover and performance is stronger than the cross-sectional relation, as the model predicts. Also as predicted, the turnover-performance relation is stronger for funds trading less-liquid stocks, such as small-cap funds. Turnover has a common component that is positively correlated with proxies for stock mispricing, consistent with funds exploiting time-varying opportunities. Turnover’s common component helps predict fund returns.

JEL-codes: G10 G20 J24 (search for similar items in EconPapers)
Date: 2014-11
Note: AP CF
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Citations: View citations in EconPapers (2)

Published as Ľuboš Pástor & Robert F. Stambaugh & Lucian A. Taylor, 2017. "Do Funds Make More When They Trade More?," Journal of Finance, American Finance Association, vol. 72(4), pages 1483-1528, August.

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Journal Article: Do Funds Make More When They Trade More? (2017)
Working Paper: Do Funds Make More When They Trade More? (2014)
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