Date of Award
8-14-2007
Degree Type
Dissertation
Degree Name
Doctor of Philosophy (PhD)
Department
Finance
First Advisor
Dr. Vikas Agarwal - Chair
Second Advisor
Dr. Ajay Subramanian
Third Advisor
Dr. Jason Greene
Fourth Advisor
Dr. Jayant Kale
Abstract
Yee Cheng Loon’s dissertation abstract Model uncertainty exists in the mutual fund literature. Researchers employ a variety of models to estimate risk-adjusted return, suggesting a lack of consensus as to which model is correct. Model uncertainty makes it difficult to draw clear inference about mutual fund performance persistence. We explicitly account for model uncertainty by using Bayesian model averaging techniques to estimate a fund’s risk-adjusted return. Our approach produces the Bayesian model averaged (BMA) alpha, which is a weighted combination of alphas from individual models. Using BMA alphas, we find evidence of performance persistence in a large sample of US equity, bond and balanced mutual funds. Funds with high BMA alphas subsequently generate higher risk-adjusted returns than funds with low BMA alphas, and the magnitude of outperformance is economically and statistically significant. We also find that mutual fund investors respond to the information content of BMA alphas. High BMA alpha funds receive subsequent cash inflows while low BMA alpha funds experience subsequent cash outflows.
DOI
https://doi.org/10.57709/1059005
Recommended Citation
Loon, Yee Cheng, "Model Uncertainty and Mutual Fund Investing." Dissertation, Georgia State University, 2007.
doi: https://doi.org/10.57709/1059005