A0429
Title: Sharpe Ratio, Volatility Asymmetry and Mutual Fund Performance
Authors: Zhenya Liu - Renmin University of China and Aix-Marseille University (France) [presenting]
Shixuan Wang - University of Reading (United Kingdom)
Yifan Zhang - Renmin University of China (China)
Abstract: We propose an asymptotically valid test based on the AGARCH(1,1) model for the sample Sharpe ratio under asymmetric-volatility returns. The motivation for such a test is based on the overwhelming evidence of asymmetric volatility we found in the excess returns of US mutual funds from 1998 to 2020. Based on our newly proposed test, we can identify some mutual funds with a significantly positive Sharpe ratio that traditional methods based on simpler assumptions cannot. Additionally, we find an anomaly in the fund portfolio based on the sorting Sharpe ratio and its asymptotic variance estimated under the AGARCH(1,1). The difference between widest-quintile and narrowest-quintile confidence intervals produces a significant annual alpha of 1.495%. Our study could be useful for investors and fund of funds managers to gain more reliable mutual fund evaluation and investment decisions.
