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Bayesian Alphas and Mutual Fund Persistence
Author(s) -
BUSSE JEFFREY A.,
IRVINE PAUL J.
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.01057.x
Subject(s) - econometrics , predictability , capital asset pricing model , economics , mutual fund , bayesian probability , cash flow , persistence (discontinuity) , bayesian inference , actuarial science , financial economics , statistics , mathematics , finance , geotechnical engineering , engineering
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.