Testing for persistence in mutual fund performance and the ex-post verification problem: evidence from the Greek market

Abstract

The present study examines a series of performance measures with the aim of solving the ex-post verification problem. These measures are employed to test the performance persistence hypothesis of domestic equity funds in Greece, during the period 1998–2004. Correctly adjusting for risk factors and documented portfolio strategies explains a significant part of the reported persistence. The intercept of the augmented Carhart regression is proposed as the most appropriate performance measure. Using this measure, weak evidence for persistence, only before 2001, is documented. The growth of the fund industry, the direction of flows to past winners and the integration in the international financial system are suggested to be the reasons for the absence of performance persistence.

Keywords:

• mutual funds
• performance persistence
• market efficiency
• emerging markets

Acknowledgements

We are grateful for helpful comments to Ian Tonks, Maria Cortez, Chrisostomos Florackis and seminar participants at the Exeter Fund Management Conference, 2006, the Business and Economics Society International Conference, 2006 and the Multinational Finance Society Conference, 2007. We are also grateful to an anonymous referee for his helpful suggestions. ESRC support through grant PTA-030-2005-00017 is gratefully acknowledged.

Notes

See Barry et al. (2002) for the apparent success of size and value strategies in the case of emerging markets and Rouwenhorst (1998) for that of momentum strategies in a series of international markets.

The study of Bollen and Busse (2005) is a recent example.

The studies of Fletcher and Forbes (2002), Tonks (2005) and Cuthbertson, Nitzsche, and O'Sullivan (2005) for the UK, Bilson, Frino, and Healey (2005) for Australia and Otten and Bams (2002) for European funds are among those that use multi-factor models.

Khorana, Servaes, and Tuffano (2005) stress the importance of wider and more reliable international evidence.

An oligopolistic financial system may also lead to herding among mutual funds, since fund companies strongly want to avoid underperforming rivals, even over very short horizons.

We have also used other similar percentages as cutoff points for constructing the strategies portfolios – the results were almost identical and are available from the authors upon request.

The table with the results for this measure is not reported for space considerations. It is readily available upon request.

See Wermers (1999) for a discussion on mutual fund herding.

We would like to thank an anonymous referee for suggesting the quartile methodology.