Bayesian Alphas and Mutual Fund Persistence

We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measu...

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Bibliographic Details
Published in:The Journal of finance (New York) 2006-10, Vol.61 (5), p.2251-2288
Main Authors: BUSSE, JEFFREY A., IRVINE, PAUL J.
Format: Article
Language:English
Subjects:
Bayesian analysis
Bayesian method
Capital Asset Pricing Model
Capital asset pricing models
Capital assets
CAPM
Cash flow
Comparative analysis
Comparative studies
Correlation analysis
Economic forecasts
Economic methodology
Financial models
Frequency standards
Frequentism
Indicators
Investors
Modeling
Mutual funds
Predictability
Predictions
Quantiles
Rates of return
Statistical variance
Stock returns
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Summary:We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measure that predicts future performance better than standard measures do. Bayesian alphas based on the Capital Asset Pricing Model (CAPM) are particularly useful for predicting future standard CAPM alphas. Over our sample period, priors consistent with moderate to diffuse beliefs in managerial skill dominate more skeptical prior beliefs, a result that is consistent with investor cash flows.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2006.01057.x