Investing in Mutual Funds Using the Bayesian Framework: Evidence from China

ABSTRACT

We explore how to invest in the Chinese mutual fund market based on the Bayesian method. We extend the portfolio construction method by integrating additional information, such as nonbenchmark assets and longer-period historical data, and by incorporating investors’ prior beliefs about the mispricing rate and managerial skills. This study analyzes growth funds, value funds, and balanced funds in China and concludes that additional information can improve the accuracy of fund performance evaluation, which will assist the construction of a more effective fund portfolio. Furthermore, the empirical evidence shows that a fund portfolio constructed using the Bayesian method is effective in China’s mutual fund market, indicating that the Bayesian method can improve the performance of this kind of portfolio.

KEY WORDS:

• Bayesian evaluation
• mutual fund
• portfolio construction

Acknowledgments

We are grateful to the editors and anonymous reviewers for their helpful comments which greatly improved the earlier draft. We also appreciate Yao Xiao as an excellent research assistant for us.

Notes

^1. According to China Securities Regulatory Commission documents, the first FOF products (the Southern fund, Harvest Fund, CCB fund, Huaxia Fund, Manulife TEDA fund, and Fortis fund) were approved on 8th September 2017.

Additional information

Funding

This work was supported by the National Science Foundation of China [grant numbers 71472085, 71672081, 71771117 and 71720107001].