Testing for persistence in US mutual funds’ performance: a Bayesian dynamic panel model

Abstract

We provide a Bayesian panel model to consider persistence in US funds' performance while we tackle the important problem of errors in variables. Our modelling departs from prior strong assumptions such as error terms across funds being independent. In fact, we provide a novel, general Bayesian model for (dynamic) panel data that is stable across different priors as reported from the mapping of the prior to the posterior of the Bayesian baseline model with the adoption of different priors. We demonstrate that our model detects previously undocumented striking variability in terms of performance and persistence across funds categories and over time, and in particular through the financial crisis. The reported stochastic volatility exhibits a rising trend as early as 2003-2004 and could act as an early warning of future crisis.

Solvency and performance persistence of defined benefit private and public pension plans

“…However, the results contrast with those of Cuthbertson et al. (2022), Klubinski and Verousis (2019) and Mamatzakis and Tsionas (2020), who reported the existence of performance persistence in United States mutual funds and hedge funds in the USA, the Cayman Islands, Luxembourg and Ireland. We cannot discuss solvency persistence findings in relation to other existing studies because we cannot find such findings in the literature.…”

“…The performance persistence findings are consistent with Machnik (2020) and Rao et al (2020), who also showed the nonexistence of performance persistence in Chinese mutual funds and Indian mutual funds, respectively. However, the results contrast with those of Cuthbertson et al (2022), Klubinski and Verousis (2019) and Mamatzakis and Tsionas (2020), who reported the existence of performance persistence in United States mutual funds and hedge funds in the USA, the Cayman Islands, Luxembourg and Ireland. We cannot discuss solvency persistence findings in relation to other existing studies because we cannot find such findings in the literature.…”

“…Their key result is that positive net alpha performance persistence can be found using small portfolios of funds together with a holding period of six months or less for both the practitioner index and academic factor models. Mamatzakis and Tsionas (2020) provide a Bayesian panel model to consider persistence in mutual fund performance in the USA. The Bayesian panel model addresses the problem of variable error.…”