Discussion Paper Details

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Title: Do Funds Make More When They Trade More?

Author(s): Lubo? Pástor, Robert F. Stambaugh and Lucian Taylor

Publication Date: November 2014

Keyword(s): active management, mutual funds, performance, skill and turnover

Programme Area(s): Financial Economics

Abstract: We find that active mutual funds perform better after trading more. This time-series relation between a fund?s turnover and its subsequent benchmarkadjusted return is especially strong for small, high-fee funds. These results are consistent with high-fee funds having greater skill to identify time-varying profit opportunities and with small funds being more able to exploit those opportunities. In addition to this novel evidence of managerial skill and fund-level decreasing returns to scale, we find evidence of industry-level decreasing returns: The positive turnover-performance relation weakens when funds act more in concert. We also identify a common component of fund trading that is correlated with mispricing proxies and helps predict fund returns.

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Bibliographic Reference

Pástor, L, Stambaugh, R and Taylor, L. 2014. 'Do Funds Make More When They Trade More?'. London, Centre for Economic Policy Research.