Volatility and mutual fund manager skill

Abstract

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Portfolio manager home‐country culture and mutual fund risk‐taking

“…Further, I construct the G_LVH factor to measure the performance between stocks with low volatility and stocks with high volatility and the G_IVOL factor to reflect the performance between stocks with low idiosyncratic volatility and high idiosyncratic volatility. In the spirit of Jordan and Riley (), the G_LVH factor is equal to the return on a value‐weighted portfolio of all the stocks in the lowest decile of the standard deviation of monthly returns during the previous calendar year less the return on a value‐weighted portfolio of all the stocks in the highest decile. The G_IVOL factor is equal to the return on a value‐weighted portfolio of all the stocks in the lowest decile of the standard deviation of the error terms from an annual four‐factor model regression of monthly returns on Fama/French global market, SMB, HML, and MOM factors during the previous calendar year less the return on a value‐weighted portfolio of all the stocks in the highest decile.…”

“…As shown in Panel A of Table , I find that abnormal returns remain positive and significant after further adjusting the G_LVH or G_IVOL factors. Further, Jordan and Riley () find that the higher mutual fund returns associated with lower fund return volatility is not related to the fund return idiosyncratic volatility and can be explained by the Fama/French profitability factor (RMW) and investment factor (CMA). Therefore, I also use the global Fama/French profitability and investment factor to adjust the monthly returns of the long‐short portfolios.…”

“…Meanwhile, portfolio managers’ home‐country security value may also affect fund performance. Previous research documents that assets with low volatility or low idiosyncratic volatility have high expected returns (see, e.g., Ang, Hodrick, Xing, & Zhang, , ; Frazzini & Pedersen, ; Haugen & Heins, ; Jordan & Riley, ). Thus, the low fund return volatility and idiosyncratic volatility associated with managers’ home‐country security value may translate into superior fund performance.…”

Does MAX matter for mutual funds?

“…In Table 3, we test whether fund MAX in the current month predicts fund performance in the following month. Similar to Amihud and Goyenko (2013) and Jordan and Riley (2015), we run Fama and MacBeth (1973) style regressions of risk-adjusted performance on various known predictors of fund Because turnover is calculated at the quarterly level, this result reports MAX relative to the prior quarter's turnover.…”

“…In robustness tests (section 6), we show that our main results also hold when calculating MAX over these alternate horizons. 4 For some recent examples, see Kacperczyk, Sialm, and Zheng (2005), Cremers and Petajisto (2009), Amihud and Goyenko (2013), and Jordan and Riley (2015). 5 In a contemporaneous study, Akbas and Genc (2016) do not detect any relationship between extreme payoffs and future fund performance when using style-adjusted monthly returns over the prior year.…”