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Risk Factor Exposure Variation and Mutual Fund Performance

Manuel Ammann (), Sebastian Fischer () and Florian Weigert ()

No 1817, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We investigate the relationship between a mutual fund’s variation in systematic risk factor exposures and its future performance. Using a dynamic state space version of Carhart (1997)’s four factor model to capture risk factor variation, we find that funds with volatile risk factor exposures underperform funds with stable risk factor exposures by 147 basis points p.a. This underperformance is neither explained by volatile risk factor loadings of a fund’s equity holdings nor driven by a fund’s forced trading through investor flows. We conclude that fund managers voluntarily attempt to time risk factors, but are unsuccessful at doing so. Our results are important in the light of recent discussions about the predictability of asset pricing risk factors.

Keywords: Mutual Fund; Market Timing; Factor Timing; Kalman Filter (search for similar items in EconPapers)
JEL-codes: G11 G14 G20 G23 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2018-08, Revised 2018-11
New Economics Papers: this item is included in nep-rmg
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Handle: RePEc:usg:sfwpfi:2018:17