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By Dr. Michel VERLAINE, ICN Business School, Head of the Finance and Risk Management Master specialization in Berlin
In principle, asset managers should trade more when they discover alpha generating trading opportunities. Thus, the performance of skilled managers should be better after an increase in trades, which implies a positive relationship between an investment fund’s turnover and subsequent returns. Pastor, Stambaugh and Taylor (2017) analyse the turnover of investment funds facing time-varying investment opportunities.
They develop a model where before fee future abnormal performance, measured by alpha, is a function of current turnover. In their model, future above fee abnormal performance is...
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