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Mutual Fund's R2 as Predictor of Performance

Mutual Fund's R2 as Predictor of Performance We propose that fund performance can be predicted by its R2, obtained from a regression of its returns on a multifactor benchmark model. Lower R2 indicates greater selectivity, and it significantly predicts better performance. Stock funds sorted into lowest-quintile lagged R2 and highest-quintile lagged alpha produce significant annual alpha of 3.8%. Across funds, R2 is positively associated with fund size and negatively associated with its expenses and manager's tenure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Mutual Fund's R2 as Predictor of Performance

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References (67)

Publisher
Oxford University Press
Copyright
© The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com.
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/hhs182
Publisher site
See Article on Publisher Site

Abstract

We propose that fund performance can be predicted by its R2, obtained from a regression of its returns on a multifactor benchmark model. Lower R2 indicates greater selectivity, and it significantly predicts better performance. Stock funds sorted into lowest-quintile lagged R2 and highest-quintile lagged alpha produce significant annual alpha of 3.8%. Across funds, R2 is positively associated with fund size and negatively associated with its expenses and manager's tenure.

Journal

The Review of Financial StudiesOxford University Press

Published: Mar 22, 2013

Keywords: JEL G20 G11 G20 G23

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