Working Paper: NBER ID: w28238
Authors: Wayne E. Ferson; Junbo L. Wang
Abstract: Portfolio performance measures using holdings data are panel regressions. The returns of a fund’s stocks are regressed on its lagged portfolio weights. Stock fixed effects isolate average performance from time-series predictive ability. Control variables condition fund performance on the characteristics of the stocks held. The long term performance of average holdings drives some of the classical measures, while predictive ability drives others. A “buy-and-hold drift,” where portfolio weights increase over time in the higher alpha stocks, affects performance measures. Investor flows respond to average performance net of the buy-and-hold drift.
Keywords: Fund performance; Panel regression; Holdings-based measures
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| informed manager's portfolio weights (G11) | stock returns (G12) |
| average abnormal return (AAR) (C22) | investor flows (F21) |
| time-series predictive ability (TSA) (C22) | investor flows (F21) |
| long-term AAR (C22) | future performance (L25) |
| buy-and-hold drift component of AAR (G19) | investor flows (F21) |