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Abstract:We propose that fund performance is predicted by its R 2 , obtained by regressing its return on the Fama-French-Carhart four benchmark portfolios. Lower R 2 , or higher idiosyncratic risk relative to total risk, measures selectivity or active management. We show that lagged R 2 has significant negative predictive coefficient in predicting alpha or Information Ratio. This is consistent with Cremers and Petajisto's (2008) results on the effect of selectivity. Funds ranked into lagged lowest-quintile R 2 and highest-quintile alpha produce significant alpha of 2.8%. Also, both fund RMSE and return volatility predict the following year's performance with significant positive and negative coefficients, respectively. Across funds, R 2 is an increasing function of fund size and a decreasing function of its age, its manager tenure and its past performance, but better performance induces funds to subsequently increase their R 2 .

Abstract:We propose that fund performance is predicted by its R 2 , obtained by regressing its return on the Fama-French-Carhart four benchmark portfolios. Lower R 2 , or higher idiosyncratic risk relative to total risk, measures selectivity or active management. We show that lagged R 2 has significant negative predictive coefficient in predicting alpha or Information Ratio. This is consistent with Cremers and Petajisto's (2008) results on the effect of selectivity. Funds ranked into lagged lowest-quintile R 2 and highest-quintile alpha produce significant alpha of 2.8%. Also, both fund RMSE and return volatility predict the following year's performance with significant positive and negative coefficients, respectively. Across funds, R 2 is an increasing function of fund size and a decreasing function of its age, its manager tenure and its past performance, but better performance induces funds to subsequently increase their R 2 .

This paper establishes liquidity linkage between stock and Treasury bond markets. There is a lead-lag relationship between illiquidity of the two markets and bidirectional Granger causality. The effect of stock illiquidity on bond illiquidity is consistent with flight-toquality or flight-to-liquidity episodes. Monetary policy impacts illiquidity. The evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market. These effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short-term maturities. The paper provides evidence of illiquidity integration between stock and bond markets.