Estimating short-run persistence in mutual fund performance

This paper analyzes the properties of a number of estimators that can be us ed 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 bias es in the estimated persistence coefficients and thus lead to spurious pers istence. Theoretical derivations, combined with a Monte Carlo study, show t hat these biases cannot be neglected for the samples that are typically use d in applied work. We also estimate the short-run persistence in two sample s of U.S. open-end mutual funds using quarterly returns for 1987-1994. An i mportant conclusion is that the results are quite sensitive to the estimati on method that is employed.