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By Jacob Epstein
This paper explores the relationship between active mutual fund performance and market dispersion from January 1990 to December 2018. I find a significant positive relationship between dispersion and 4-factor alpha overall, providing some evidence of managerial skill. There are large differences in this relationship by decade and fund selectivity. The results suggest active mutual funds were able to take advantage of stock-picking opportunities during the 1990s and 2000s, particularly the most active subset of funds. However, I find a significant negative relationship between dispersion and alpha for funds in the 2010s, indicating this relationship has changed over time. I discuss several possible explanations for this reversal, which could present interesting avenues for further research.
Advisors: Professor Emma Rasiel | JEL Codes: G1, G12, G23