Evaluating and Investing in Equity Mutual Funds

Lubos Pastor and Robert Stambaugh

No 7779, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Our framework for evaluating and investing in mutual funds combines observed returns on funds and passive assets with prior beliefs that distinguish pricing-model inaccuracy from managerial skill. A fund's alpha' is defined using passive benchmarks. We show that returns on non-benchmark passive assets help estimate that alpha more precisely for most funds. The resulting estimates generally vary less than standard estimates across alternative benchmark specifications. Optimal portfolios constructed from a large universe of equity funds can include actively managed funds even when managerial skill is precluded. The fund universe offers no close substitutes for the Fama-French and momentum benchmarks.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2000-07
New Economics Papers: this item is included in nep-fin
Note: AP
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Citations: View citations in EconPapers (1)

Published as Pastor, Lubog and Robert F. Stambaugh. "Investing In Equity Mutual Funds," Journal of Financial Economics, 2002, v63(3,Mar), 351-380.

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