Study about European domestic mutual funds performance persistence

Abstract

Persistence in mutual funds’ performance is a subject that has been highly debated among the literature. No consensus has been reached yet and most of the work related to the topic have been done on U.S. markets. However, due to the recent development in European market importance, it becomes easier and more relevant to study this market as well. Persistence in performance has important consequences from an economic and practical perspective, if persistence is proven to be existing, then it represents a serious challenge to market efficiency, and it could also represent an important screening mechanism for investors.

This thesis will study the performance of active domestic equity funds in Europe, focusing on 5th countries that are France, Germany, Italy, Netherlands, and Spain.

First, a review of the literature regarding market efficiency, active management, and performance persistence in the U.S. and in Europe is performed, then a quick summary about the dataset is described and then we explain the methodology that will be used. Finally, empirical results are analyzed. To perform the analysis, we use several multi-factor models to calculate performance, as well as the use of the False Discovery Rate (FDR) to identify funds with a truly significant alpha and to eliminate the chance factor. In addition, we also use a non-parametric approach by using the Winner-Loser test and performing statistical tests on its results.

The first objective of this paper is to give an overview on the efficiency of European markets and the existence of "Skill" among mutual fund managers by also testing whether past performance can give information on future performance (if the existence of persistence is proven). And the second objective would be to study the performance of domestic funds knowing that there is a cognitive bias for investors called "home bias" which pushes investors to overweight domestic investments compared to international investments, and to know if this bias is motivated by an "informational advantage" or if it is simply motivated by the familiarity that investors have with these companies and would therefore be an irrational choice.