Model Uncertainty, Performance Persistence and Flows

Abstract

Model uncertainty makes it difficult to draw clear inference about mutual fund performance persistence. I propose a new performance measure, Bayesian Model Averaged (BMA) alpha, which explicitly accounts for model uncertainty. Using BMA alphas, I find evidence of performance persistence in a large sample of US funds. There is a positive and asymmetric relation between flows and past BMA alphas, suggesting that fund investors respond to the information in BMA alphas. My findings are robust to various sensitivity analyses, including alternative measures of post-ranking performance, flows and total net assets, and alternative econometric model specifications.