Quantifying Diseconomies Of Scale For Mutual Funds

The fund size is highly persistent and correlated with risk factor loadings. Hence, it is unrealistic to assume constant diseconomies of scale over a long time. The traditional two-step method underestimates the uncertainty of diseconomies of scale. We propose a one-step procedure with a random weighted bootstrap method to infer diseconomies of scale using rolling windows, which effectively solves the problems. Our empirical analysis using actively-managed U.S. equity mutual funds supports diseconomies of scale, and simulations show that our rigorous method outperforms the two-step one in terms of precise estimating uncertainty