Finance Papers

Document Type

Journal Article

Date of this Version

8-2017

Publication Source

The Journal of Finance

Volume

72

Issue

4

Start Page

1483

Last Page

1528

DOI

10.1111/jofi.12509

Abstract

We model fund turnover in the presence of time-varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark-adjusted return. We find such a relation for equity mutual funds. This time-series relation between turnover and performance is stronger than the cross-sectional relation, as the model predicts. Also as predicted, the turnover-performance relation is stronger for funds trading less-liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund's performance.

Copyright/Permission Statement

(Postprint statement) This is the peer reviewed version of the following article:PÁSTOR, Ľ., STAMBAUGH, R. F. and TAYLOR, L. A. (2017), Do Funds Make More When They Trade More?. The Journal of Finance, 72: 1483–1528. doi:10.1111/jofi.12509, which has been published in final form at http://dx.doi.org/10.1111/jofi.12509. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms

Embargo Date

5-15-2019

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Date Posted: 27 November 2017

This document has been peer reviewed.