Estimating performance aspects of Greek equity funds with a liquidity-augmented factor model

Abstract

The present study, employing a survivorship-bias free dataset, assesses the performance of Greek domestic equity funds during the period June 2001–December 2009 controlling for the thin trading risk that is inherent in the Greek stock market. Augmenting Carhart's multi-benchmark model (1997) with a stock-level liquidity factor, we document the absence of skills among domestic equity fund managers. However, at a fund level, we detect the evidence of a statistically and economically significant outperformance. Additionally, we examine the relationship between fund performance and a series of cost and operational attributes employing a robust quantile regression method. Cross-sectional results demonstrate a significant inverse relationship between fund performance and expenses. Moreover, our findings show that the larger the fund, the lower the performance.

Keywords:

• mutual funds
• multi-factor models
• liquidity
• quantile regression

JEL Classification::

• G14
• G15
• G21
• G23

Notes

¹ Ross (1976), Roll (1977).

² See p. 70, footnote 6.

³ Domestic equity funds that are domiciled in Luxembourg have been excluded from our analysis.

⁴ Total return Index is available from June 2001.

⁵ We would like to thank an anonymous referee for his helpful comments on this issue.

⁶ Dividends are already included in funds’ return calculation since domestic equity funds do not distribute dividends separately to their shareholders.

⁷ Wermers (2000) reported that on average only 83% of a fund's assets is in equity. He claimed that ‘the substantial portion of the underperformance of mutual funds versus stock indices can be traced to fund investments in non-stock securities’. His findings reveal that nonstock holdings result in 70 b.p. per year lower returns.

⁸ Generally, each quantile regression defines a particular, centre or tail, point of a conditional distribution. This approach also allows the estimation of the median (0.5th quantile) function as a special case, which can be thought of the mean function of the conditional distribution of funds’ performance.

⁹ Brown et al. (1992).

¹⁰ Results are available from the authors upon request.

¹¹ We would like to thank an anonymous referee for bringing this to our attention.

¹² Otten and Bams (2002), Chen et al. (2004), Cremers et al. (2011).

¹³ As stated earlier, domestic capital market is characterized by small capitalization and low trading activity for many listed stocks.

¹⁴ Following Carhart (1997), we have augmented its four-factor performance evaluation model with a stock level liquidity factor. The time series estimated coefficient of funds’ exposure to this risk factor stands for Liq_t .

¹⁵ Babalos et al. (2009) concluded that domestic equity funds’ total expense ratio is relatively stable around 3% p.a.