This paper analyzes the properties of a number of estimators that can be used to estimate short-run persistence in mutual fund returns. When data for different funds are pooled, it is advisable to correct for cross-sectional differences in expected returns. However, these adjustments may induce biases in the estimated persistence coefficients and thus lead to spurious persistence. Theoretical derivations, combined with a Monte Carlo study, show that these biases cannot be neglected for the samples that are typically used in applied work. We also estimate the short-run persistence in two samples of U.S. open-end mutual funds using quarterly returns for 1987-1994. An important conclusion is that the results are quite sensitive to the estimation method that is employed.

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The Review of Economics and Statistics
Erasmus School of Economics

ter Horst, J.R, & Verbeek, M.J.C.M. (2000). Estimating Short-Run Persistence in Mutual Fund Performance. The Review of Economics and Statistics, 645–655. doi:10.1162/003465300558984