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A study of idiosyncratic volatility in mutual fund performance

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Item Summary

Title: A study of idiosyncratic volatility in mutual fund performance
Authors: Phan, Trang Thu
Keywords: Mutual Fund
Idiosyncratic Volatility
Active Management
Issue Date: May 2014
Publisher: [Honolulu] : [University of Hawaii at Manoa], [May 2014]
Abstract: This research examines idiosyncratic volatility in mutual fund performance. It has two chapters.
In the fi rst chapter, we explore how fund managers have historically invested in stocks with diff erent idiosyncratic volatilities and whether the idiosyncratic volatility of assets in a mutual fund portfolio is correlated with the funds performance. We find that mutual funds underweight stocks with the highest and lowest idiosyncratic volatilities; on average, loadings on high idiosyncratic volatility stocks tend to lower fund performance; and there is no evidence that actively managed funds exploit and pro t from the negative relationship between idiosyncratic volatility and stock returns reported in prior studies.
In the second chapter, we present "Residual Correlation" as a unifying measure of mutual fund active management. By decomposing portfolio idiosyncratic volatility into variance and covariance terms, we construct our "Residual Correlation" measure. We propose that skillful fund managers will anticipate positive unsystematic return events. By exposing their portfolios to those events, their portfolios will show correlated returns that are independent of common risk factors. Therefore, active management should be revealed through these correlated asset returns. We show that our measure can identify active management as precisely as various other measures of active management and that it also does so among groups of funds where other measures cannot.
Description: Ph.D. University of Hawaii at Manoa 2014.
Includes bibliographical references.
Rights: All UHM dissertations and theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission from the copyright owner.
Appears in Collections:Ph.D. - International Management

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