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DISCUSSION PAPER PI-9904

The Hazards of Mutual Fund Underperformance: A Cox
Regression Analysis*

Asger Lunde¹, Allan Timmermann²†, and David Blake³

¹Institute of Economics, University of Aarhus, Denmark
²Departments of Economics, UC San Diego, USA
³Birkbeck College, University of London, UK

ABSTRACT

This paper investigates the process determining mutual funds'
conditional probability of closure, i.e. their hazard function. Using
a nonparametric approach to estimate the effects of a fund's age
on its hazard rate, we find a distinctly nonlinear, inverse U-shaped
pattern in the relationship. Hence young and very old funds are
least likely to be closed down. A fund's relative performance and
(less significantly) the level of return in the sector in which the fund
operates are also identified as important factors in the closure decision.
Results from semiparametric Cox regressions are compared with those
from the discrete choice probit model used by Brown and Goetzmann
(1995). Finally, we provide a complete summary of the fund attrition process
by estimating the survivor function, indicating the proportion of funds
that survive up to a given age, and we identify the effect of fund attrition
on standard measures of persistence of fund performance.

*The first author would like to thank the Center for Nonlinear Modelling in
Economics, University of Aarhus for financial support. Further we would
like to thank Rob Engle, Tony Lancaster, Lars Muus, Jeff Russell, Pravin
Travedi and seminar participants at UCSD for discussions and comments
on this paper. We also thank John Richardson of Micropal Ltd. For providing
us with the data set used in the analysis.

†Corresponding author. Tel: + 44 20 7955 6394, Fax: +44 20 7955 7420 Email:a.timmermann@lse.ac.uk

ISSN 1367-580x.