Persistence in Mutual Fund Performance: 2.0
We address two important shortcomings in the persistence literature. The first is the possibility that the documented persistence could be due to calendar related distortions of fund returns instead of skill differentials. We also explore the possibility that Carhart's popular 4 factor model of performance attribution may not be adequate in explaining the returns of prior performance ranked portfolios of mutual fund. Using performance attribution models employed in the existing literature, we document that once the calendar year end noise is masked, measures of persistence are strikingly smaller, regardless of the period studied. We also find that using a longer term momentum factor results in a much better performance attribution model compared to using Carhart's short term momentum factor. Once the longer term momentum factor replaces the short term momentum factor, persistence in fund performance disappear even when the portfolios are formed at the end of the calendar years.