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Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988.
The relative performance of no-load, growth-oriented mutual funds persists in the near term, with the strongest evidence for a one-year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk-adjusted performance between the top and bottom octile portfoli os is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a differen t (previously used) data set and with some post-1988 data confirm the finding of persistence.
The J-Shape of Performance Persistence Given Survivorship Bias
Performance may enhance survival probability. When it does, the induced lack of randomness challenges robust and unbiased inference. If survivors are sorted into two groups based on past performance, spurious persistence has been demonstrated if variance in performance is heterogeneous. However, as we show both theoretically and with simulations, if performance is categorized finely, the spurious persistence will be J-shaped; that is, at the bottom better performance in one period “predicts” worse performance for another period. We propose a simple t-test applied to the quadratic coefficient in a regression to distinguish between a spurious J-shape and monotonic patterns. Mutual funds, our example, exhibit the monotonically increasing pattern produced by true performance persistence.
The Rationality Struggle: Illustrations from Financial Markets
Hot Hands in Mutual Funds: Short‐Run Persistence of Relative Performance, 1974–1988
ABSTRACT The relative performance of no‐load, growth‐oriented mutual funds persists in the near term, with the strongest evidence for a one‐year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk‐adjusted performance between the top and bottom octile portfolios is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a different (previously used) data set and with some post‐1988 data confirm the finding of persistence.