What drives the time-varying performance of Japanese mutual funds?
Faculty of Business and Law
School of Business
In this chapter, we review the performance of Japanese mutual funds with the most recent data and examine the time-varying volatility and the leverage effect of Japanese mutual funds over the business cycle by using a Markov Regime-Switching GARCH model. The results suggest that volatility persistence of Japanese mutual funds are generally quite large and vary significantly with their business cycles. Moreover, the significant leverage effects of shocks on volatility are observed, and positive shocks generally have greater positive effects than negative shocks. Also, we find that contemporary news sentiment and flow can reduce a considerable proportion of the volatility persistence. The effects are different, depending on the states of business cycle. Finally, the marginal effects of negative and positive news on volatility are roughly symmetric in both states of business cycle. All the results are robust when mutual funds are modeled within the proxied global business cycle. Our results have important implications for investors seeking opportunity of portfolio diversification.