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Risk Factor Exposure Variation and Mutual Fund Performance

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  • Manuel Ammann
  • Sebastian Fischer
  • Florian Weigert

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.

Suggested Citation

  • Manuel Ammann & Sebastian Fischer & Florian Weigert, 2018. "Risk Factor Exposure Variation and Mutual Fund Performance," Working Papers on Finance 1817, University of St. Gallen, School of Finance, revised Nov 2018.
    • Handle: RePEc:usg:sfwpfi:2018:17
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    References listed on IDEAS

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    More about this item

    Keywords

    Mutual Fund; Market Timing; Factor Timing; Kalman Filter;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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